Great article

I am quoted along with ELX is a parasite exchange that exists solely to steal liquidity and rip off its own customers. The owners of ELX seek to take futures trading underground and into the back office like they have equity options, equities, and OTC products. They are not interested in competitive price discovery.

Pirrong in the last line of the article says,”If ELX did get access to CME…If someone other than the banks want to support ELX, then fine, but why would I go to a less liquid market.”

Let’s assume that ELX is successful. ELX would not be alone. There would be ten more exchanges that would crop up and begin trading Treasuries and trying to steal liquidity adding to fragmentation and darker markets. Look at the equity options, and cash equity market. Most of the trading is not done at the NYSE or NASDAQ, but off the broader markets in ECN’s(Electronic Communication Networks). This way, banks can trade against their customer order flow, pay for order flow and match it up there. The bankers want treasuries to be the same way, and ELX was started to accomplish that goal.

They (ELX) did 77K or 90K volume last Friday, depending on who you listen to. CME did over 18M. ELX bid ask spread is wider, and it is never there when the market is busy. No one makes a good market, unless they want to pick someone off. Essentially all the volume at the ELX exchange is washed trades. They are pre-arranged and made to look like things are happening when things are not happening. I doubt they even charge fees.

Back when Eurex was competing head to head with LIFFE for the Bund contract, Eurex rebated all its market makers huge sums of money to bring the contract over. It was more than a competition between electronic trade and open outcry trade. Eurex subsidized the move, and “encouraged” German banks to trade German debt at a German exchange.
LIFFE never stood a chance.

Banks may talk about the high fees that they pay but this is a straw man argument. Banks are not worried about fees. They want a wider bid ask spread, with less competition. The CME Group market place invites competition and makes everyone play on an even playing field. By the way, a proprietary trading desk at a bank pays .05 cents per contract. That’s only .10 cents a round turn to handle $100,000 worth of notional value of Treasuries. In addition, the bank is allowed to cross margin their entire portfolio of Treasuries, Grains, Energy, Meat, Dairy, Short Term Interest Rates, Metals, and Equities in one spot freeing up billions in capital. Fees are not relevant to this argument.

ELX is supported by the NY Banks. The NY banks exist to take markets underground and make money off them. They don’t like competition. The more dark markets and fragmentation they can create, the better for them.