Guest Commentary from ELX’s Neal Wolkoff:

John,

ELX Futures, a new electronic futures exchange, launched barely more than a week ago, and yesterday matched well over three percent of US Treasury futures volume. While I appreciate the prominence of being the lead item in your widely read column, there are a few items that I believe need to be clarified.

First, intermarket arbitrage is new to the futures industry because markets have consolidated to the point where arbitrage can only be conducted between futures and other financial sectors like cash or securities. However, in equity options and cash equities, a vibrant assortment of exchanges are electronically tied together by ISVs and regulatory fiat. Market arbitrage is a common, everyday, indeed every second, event, and no one, including the SEC and FINRA, calls it “painting the tape,” as you do. ELX simply uses technology in the way competitive markets use it, and not in the way non-competitive environments have become accustomed to. ELX is a regulated exchange, and the NFA conducts surveillance of our trading for such activity as wash trading, the formal name for “painting the tape.” What we offer is a competitive, ultra-fast market that attracts arbitrage. It is not only legal, but beneficial to price competition, which is of course good for the public, whether they use ELX or not.

As for transparency, our rules fully disclose how our matching algorithms work, and our rules are posted on our website. We have used the same basic matching rules as the market is accustomed to at the Chicago market. Your suggestion to let the “public go first” is a specialist model and sounds wonderful until you realize that specialists demand something in return like greater fill ratios for this benevolence. As former Chairman and CEO of the American Stock Exchange, I can attest that the Specialist model has a number of benefits, but we did not believe it appropriate for a newly created electronic futures exchange where users would be unfamiliar with the mechanics of such a model.

You also note that our decision to give free access to ELX market data for one year through Bloomberg, CQG, and Thomson Reuters (in the category of no good deed going unpunished) is somehow a secret, we describe this in our FAQs, each vendor markets the availability of free ELX data, and in case that’s not sufficient, we have added the deal term “free” to the web category “Market Data.”

Lastly, marketing. You note that we have not done many large events. That’s true. But we do an awful lot of personal visits. I will be Chairing the Boy Scouts of America event Thursday in Chicago. We will be in Chicago on July 30th at a White Sox/Yankees game (Go Sox) sponsored by FIA. At the Amex, we hosted many events – they were ineffective. I have been at the EVP, COO or CEO level at futures and securities exchanges for 16 of my 29 years in the industry. This is going OK so far. I’d be more than happy to sit down with you in the near future to further discuss our business.

Best Wishes,

Neal L. Wolkoff
Chief Executive Officer
ELX Futures, L.P.
110 East 59th Street
New York, NY 10022
(Tel) 212 294-8056
(Fax) 212 294-8058
nwolkoff@elxfutures.com

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