CME Shares Slip on Rival Exchange

Late Friday, 12 financial institutions including Merrill Lynch & Co., Citigroup Inc., and Bank of America Corp. unveiled a plan for an electronic trading exchange. Initially, the exchange will host trading of futures contracts linked to U.S. Treasury bonds and then branch into new products later next year.

The foray clearly intends to muscle in on CME Group's terrain. CME Group, which operates the Chicago Mercantile Exchange and the Chicago Board of Trade, handles almost all trading of Treasury futures, analysts said.

CME Group's shares slipped $16.75, or 2.4 percent, to close at $694 Monday.

The concern is that this rival exchange which will be powered by eSpeed's electronic platform will charge cheaper rates for facilitating trades and steal market share, forcing CME Group to cut its commissions or lose dominance.

This is not the first time CME Group has faced an incursion into its Treasury futures trading business. ESpeed's Cantor Exchange in 1999, BrokerTec in 2001, and Eurex U.S. in 2004 all tried to loosen CME's stranglehold on this product but all failed.

The futility of these efforts shows how difficult it is to cultivate the customers, trading volume and liquidity needed to run a viable exchange hosting Treasury trading, said Wachovia Capital Markets analyst Jonathan Casteleyn.

While Eurex U.S. put a small dent in CME's Treasury business, the exchange cut prices about 20 percent to protect its turf and then raised prices again once the Eurex threat was extinguished, Casteleyn noted.

Further, CME's Treasury trading is protected by an even wider moat than it was two years ago. When Eurex's Treasury trading launched, CME Group hosted trading of 2 million Treasury contracts a day. That amount has since doubled.

"It is unlikely to have more success than past attempts," Goldman Sachs analyst Daniel Harris wrote in a client note, referring to the startup exchange.