Billionaire Howard Lutnick Is Taking On Exchange Giant CME
Cantor Fitzgerald’s CEO previously helped transform the bond market
Howard Lutnick became a billionaire by shaking up the clubby world of Wall Street bond trading. Now the chairman and CEO of Cantor Fitzgerald is taking on one of the biggest powerhouses in finance.
Regulators said Monday that they signed off on Lutnick’s plan to introduce a new market for interest-rate futures, which is dominated by exchange giant CME Group CME 0.60%increase; green up pointing triangle. The venture, FMX Futures Exchange, will launch in mid-2024, said Lutnick. FMX is a unit of Cantor’s brokerage affiliate BGC Group.
Trillions of dollars worth of CME’s interest-rate futures change hands each day. Traders use the contracts to hedge against swings in rates or bet on Federal Reserve policy.
CME, which runs futures markets on a variety of commodities, handles more than 99% of trading volume in U.S. interest-rate futures, according to industry group FIA. That lucrative franchise has helped make the Chicago-based company the world’s most valuable exchange operator, with a market cap of $73 billion.
The Commodity Futures Trading Commission released an order Monday approving FMX’s application to launch a new market. FMX plans to list futures linked to Treasury yields and the Secured Overnight Financing Rate, a benchmark short-term rate. Such futures will compete directly with contracts at CME.
Analysts say the 62-year-old Lutnick faces long odds. Previous attempts to break into the interest-rate futures business have fizzled—including one backed by Lutnick more than a decade ago.
“They’re not the first and they won’t be the last to challenge CME’s dominance,” said Kevin McPartland, senior analyst with Coalition Greenwich. “Breaking that up is going to be tremendously hard.”
Lutnick is perhaps best known for leading Cantor through the 9/11 terrorist attacks, which killed 658 of the firm’s 960 New York-based employees. Lutnick survived by chance—he was late to work that day—and spent the following years rebuilding Cantor.
In the 1990s, he helped transform the bond market with eSpeed. The electronic platform for trading Treasurys contributed to the demise of old-fashioned voice brokers who arranged government-bond deals by telephone.
Lutnick’s BGC sold the platform to Nasdaq in 2013. But Lutnick jumped back in four years later, just after the expiration of a noncompete clause that restricted his companies from offering fully electronic trading of Treasurys. BGC rolled out Fenics UST, another trading platform for government bonds.
Fenics has since gained market share at the expense of larger rivals, including BrokerTec, the Treasurys-trading platform owned by CME. In November, Fenics handled nearly 10% of the total electronically traded volume in Treasurys, or about $44 billion a day, according to Coalition Greenwich.
Lutnick said the banks and high-speed trading firms already plugged into Fenics are a natural user base for his new futures exchange. The cost of trading on FMX will be “wildly cheaper” than at CME, he said.
“We are ready and able to compete with anybody,” Terrence Duffy, CME’s chairman and CEO, said on an October earnings call when asked about FMX.
CME has a key advantage in fending off competition. In addition to running the market where traders buy and sell futures, CME runs the related clearinghouse—the underlying plumbing system that holds collateral for big trading firms and moves cash around to settle winning and losing trades.
Rival exchanges can’t use CME’s clearinghouse, and convincing traders to connect to a different one has historically been difficult for competitors. Trading firms would need to post collateral in two separate places to support a new futures exchange, since they are unlikely to abandon CME altogether for an untested startup.
Lutnick has tried to solve that dilemma by agreeing to clear FMX’s trades through LCH, owned by London Stock Exchange Group. LCH is one of the world’s major clearinghouses, used by many banks to clear trades in interest-rate swaps.
Among the unsuccessful challengers to CME in years past was NYSE Euronext, the old parent company of the New York Stock Exchange. Lutnick backed an interest-rate futures exchange that launched in 2009, but the venture, ELX Futures, struggled to gain traction. Lutnick blamed the failure on weaknesses in its clearing arrangements.
“If I had been wise, I wouldn’t have opened it,” he said.