[Chicago2020]

The US's two largest futures exchanges are combining in an $8bn (£4.3bn) deal
BBC World News

Chicago Mercantile Exchange (CME) has agreed to buy Chicago Board of Trade (CBOT), signalling the latest round of consolidation in US financial markets.

The companies said that the move would "transform global derivatives markets", and allow them to cut costs and serve a broader range of customers.

The new firm will be called CME Group and expects to complete an average of 9 million contracts each day.

Based in Chicago, CME chairman Terrence Duffy will head the group, while CBOT's Charles Carey will be vice-chairman.

'Monstrous'

While the move has not come out of the blue, analysts said that the creation of the super-exchange could well change the way markets have been run.

"These are probably the two wealthiest, most powerful futures exchanges in this country, and combining them makes almost a Microsoft-type entity," said Randy Frederick, director of derivatives at Charles Scwab in Austin, Texas.

The merger could make them "monstrous and hard to compete with", he said.

According to Boyd Cruel, an analyst at Alaron Trading: "This merger creates a single entity with a wide breadth of products."

"They are just basically going to be battling the other exchanges in the world. It's all Chicago," he added.

[Marcu]

At more than $25 billion in market capitalization, the combined company will dwarf all other exchanges, including NYSE Group. A big move for Chicago.

[Chi_Coruscant]

The merger could make Chicago as the center of exchanges world.

[the urban politician]

So much ass is getting kicked right now that my head is spinning

[VivaLFuego]

The merger could make Chicago as the center of exchanges world.
We're already basically the center of the derivatives exchange world, this merger probably solidifies it. We were a natural, since we were the transport/distribution hub for the giant commodity production machine that was and is the central US.

[UrbanSophist]

Very exciting times, methinks.

I think I'll have to agree with TUP. My head is spinning.

[JMH_Architecture]

Wait this merger would make them bigger than the NYSE

[UrbanSophist]

A lot bigger...

[James Bond Agent 007]

Soooo . . . what are they gonna call the combined entity? :???: Do they know yet?

I hope whatever it is, it includes the word "Chicago" in it!

[JMH_Architecture]

http://en.wikipedia.org/wiki/List_of_stock_exchanges
1. New York Stock Exchange - $14.2
2. Tokyo Stock Exchange - $4.5
3. NASDAQ - $3.6
4. London Stock Exchange - $3.5
5. Euronext - $3.3
6. Toronto Stock Exchange - $1.7
7. Frankfurt Stock Exchange (Deutsche Börse) - $1.4
8. Hong Kong Stock Exchange - $1.4 (as of Oct-2006)
9. Madrid Stock Exchange (BME Spanish Exchanges) - $1.1
10. SWX Swiss Exchange - $1.1
11. Milan Stock Exchange (Borsa Italiana) - $0.94

where would it rank on this list.

[i_am_hydrogen]

^No. 1, I presume.

http://www.forbes.com/home/business/...m_1017cme.html

The $25 Billion Gorilla
Liz Moyer, 10.17.06, 1:33 PM ET

It was the deal everyone was waiting for.

Chicago Mercantile Exchange's $8 billion purchase of rival CBOT Holdings, announced Tuesday, would be a dream for futures traders. At more than $25 billion in market capitalization, the combined company will dwarf all other exchanges, including NYSE Group and other cash equity venues. It will hold a titanium grip on trading in interest rate futures and indexes, and a firm control over the markets for agricultural and other commodities.

Through an arrangement earlier this year with the New York Mercantile Exchange, the Merc also has a growing business in electronic-trading energy futures, a booming business.

But there are questions about whether the deal will proceed because of antitrust concerns, even though Craig Donohue, CME's chief executive officer, insisted on a conference call Tuesday that he doesn't expect regulatory issues to be a problem.

Some clients of the exchanges say their merger will reduce competition and threaten to raise prices on trade clearing. "Certainly, if you want to trade a certain future, there will be nowhere else to go," says Steve Sanders, managing director of business development at Interactive Brokers in Chicago. "It would be nice to see more competition."

But executives of the two derivatives markets said Tuesday that global competition made their merger compelling. ''The idea to merge these two great companies has been contemplated for decades,'' said CME chairman Terrence A. Duffy, who will become chairman of the combined organization. Serious talks have been taking place for almost a year, executives said.

The combined firm, which will move all its floor traders to the Board of Trade's familiar trading pits in downtown Chicago, will handle nearly 9 million contracts daily in a derivatives market that has seen explosive growth and profitability over the last few years.

The Merc will need clearance for the merger from the U.S. Securities and Exchange Commission, the Commodities Futures Trading Commission and the U.S. Justice Department.

There would certainly be no equivalent market in the U.S., though the Merc and Board of Trade could argue that there are plenty of alternatives to using them for traders. In equity derivatives, for example, there are the options exchanges and the blossoming industry of electronic-traded funds. In fixed-income products, there are the over-the-counter trading venues.

In Europe, two derivatives markets stand to face a more formidable foe. Euronext's Liffe exchange and Eurex, owned by Deutsche Börse and the Swiss exchange, might possibly explore a combination of their own, an analyst said.

Consolidation is the rage in global markets. NYSE, parent of the New York Stock Exchange, has proposed to merge with Euronext, while Nasdaq (nasdaq: NDAQ - news - people ) has taken a substantial stake in the London Stock Exchange, with an eye to acquiring more.

Members of the New York Mercantile Exchange, the world's largest energy market, recently approved a plan for an initial public stock offering. The Nymex is increasingly under pressure from an upstart Atlanta-based electronic market, the Intercontinental Exchange (nyse: ICE - news - people ), which in a few short months has captured more than a quarter of the share of daily trading in Nymex's benchmark oil contract.

Competition from ICE drove Nymex into the arms of the Merc earlier this year. Nymex is transitioning the trading of its big energy contracts onto Merc's electronic platform, where they will trade alongside Nymex's floor traders in New York.

A Nymex spokeswoman said in a statement Tuesday, "NYMEX congratulates CME on its historic agreement with the CBOT, which we believe is further evidence of the consolidation in our industry."

Analysts and market participants have long said the Merc has the most envious competitive position of all, with its dominance in the growing business of derivatives trading.

One hint that the government might not block the deal: The two markets combined their clearing operations three years ago without interference from regulators.

The markets "have been an environment where you see a lot of ideas thrown at the wall," says Jamie Selway, head of research at New York's White Cap Trading. "This is the deal that we thought would make sense."

[Grimm,NY]

At more than $25 billion in market capitalization, the combined company will dwarf all other exchanges, including NYSE Group. A big move for Chicago.

Perhaps you mean the Nymex. The NYSE's market capitalization is over 14 trillion. Both the CBOT and the CME are listed on the NYSE.

[brian_b]

Perhaps you mean the Nymex. The NYSE's market capitalization is over 14 trillion. Both the CBOT and the CME are listed on the NYSE.

I believe you are referring to the market cap of all the stocks listed on the NYSE. The numbers being thrown around in this thread are the value of the exchanges themselves, not what's being traded through them.

[JMH_Architecture]

Could someone explian this clearly is this going to be the biggest stock exchange or what. What the implications for chicago is it going to have it's own wall street type thing I very confussed.

[brian_b]

I read in a related article that they are going to pretty much consolidate everthing over to the BOT, so it looks like that MERC building should be available for other uses soon.

This is good if for no other reason that a larger Chicago trading entity will be more unlikely to be taken over by another exchange or financial istitution.

I'd really like to see what sort of adaptive reuse ideas people come up with for the trading floor at the MERC.

[Steely Dan]

I'd really like to see what sort of adaptive reuse ideas people come up with for the trading floor at the MERC.

two words: roller disco.

or is that just one hyphenated word?

[STR]

Could someone explian this clearly is this going to be the biggest stock exchange or what. What the implications for chicago is it going to have it's own wall street type thing I very confussed.

These are NOT stock exchanges. They are commodities, futures and derivatives exchanges. Totally different.

However, the CME, even prior to the merger, was the largest commodities market already.

[JMH_Architecture]

These are NOT stock exchanges. They are commodities, futures and derivatives exchanges. Totally different.

However, the CME, even prior to the merger, was the largest commodities market already.
thanks they were confussing me

[chiphile]

I was really hoping though for CME to acquire more overseas markets, and expand Chicago's global reach before others like NYSE take over them.

[HK Chicago]

The NYSE's market capitalization is over 14 trillion.
That's too funny.

I'd really like to see what sort of adaptive reuse ideas people come up with for the trading floor at the MERC.
The 2nd CBOT floor was purposed to office space (Peak6, used to have the full 2nd floor of the Rookery, these guys know their space!), but I don't think that could be done at the CME. Honestly, it's a dump.

I was really hoping though for CME to acquire more overseas markets, and expand Chicago's global reach before others like NYSE take over them
Expect the CME Group to develop their own overseas markets through relationships (i.e. like the NYMEX deal). CME is not really in the business of running exchanges, we'll see they're more interested in having a hand in the markets (contracts, matching, clearing) then regulatory concerns, facilities, and accounts.

[pricemazda]

The merger could make Chicago as the center of exchanges world.

Well not quite, Chicago is leader in terms of derivatives. But you forget about the number one commodity oil. NYMEX and the London Petroleum Exchange are leaders forn respectively Sweet Crude and Brent.

Also London leads in terms of metals.

One question, I don't see how competition authorities in the US would allow such a monster merger to go ahead. Surely the merger would create a virtual monopoly in derivatives trading?

[pricemazda]

http://en.wikipedia.org/wiki/List_of_stock_exchanges
1. New York Stock Exchange - $14.2
2. Tokyo Stock Exchange - $4.5
3. NASDAQ - $3.6
4. London Stock Exchange - $3.5
5. Euronext - $3.3
6. Toronto Stock Exchange - $1.7
7. Frankfurt Stock Exchange (Deutsche Börse) - $1.4
8. Hong Kong Stock Exchange - $1.4 (as of Oct-2006)
9. Madrid Stock Exchange (BME Spanish Exchanges) - $1.1
10. SWX Swiss Exchange - $1.1
11. Milan Stock Exchange (Borsa Italiana) - $0.94

where would it rank on this list.

You should be careful with listings for Euronext, it is one company that owns 4 exchanges.

A better measures would be the market cap of companies listed on exchanges, rather than the market cap of the companies that own the exchange,

[chi-townJay]

It would be pretty cool if they did go ahead with the whole chicago stock exchange thing,Daley did say he wants to make Chicago a GLOBAL city did'nt he?I think if they're interested in making alot of money and doing something really big for themselves and the city that they would look into a chicago stock exchange,now would be the time.

[Marcu]

It would be pretty cool if they did go ahead with the whole chicago stock exchange thing,Daley did say he wants to make Chicago a GLOBAL city did'nt he?I think if they're interested in making alot of money and doing something really big for themselves and the city that they would look into a chicago stock exchange,now would be the time.

There already is a Chicago Stock Exchange. http://www.chx.com/
http://www.math.lsu.edu/~beck/interest/Vacation03/Chicago/page10.jpg



The CBOT/CME is not for stock trading

[chi-townJay]

There already is a Chicago Stock Exchange. http://www.chx.com/
http://www.math.lsu.edu/~beck/interest/Vacation03/Chicago/page10.jpg



The CBOT/CME is not for stock trading


yes i know sorry about that i meant on a larger scale

[the urban politician]

It would be pretty cool if they did go ahead with the whole chicago stock exchange thing,Daley did say he wants to make Chicago a GLOBAL city did'nt he?I think if they're interested in making alot of money and doing something really big for themselves and the city that they would look into a chicago stock exchange,now would be the time.

^ Dude, no offense, but WHAT?

[the urban politician]

Well not quite, Chicago is leader in terms of derivatives. But you forget about the number one commodity oil. NYMEX and the London Petroleum Exchange are leaders forn respectively Sweet Crude and Brent.

^ That's fine and all, but lets not get too comfortable by ignoring the following (pulled from the article cited in post #12 from this thread):

"Members of the New York Mercantile Exchange, the world's largest energy market, recently approved a plan for an initial public stock offering. The Nymex is increasingly under pressure from an upstart Atlanta-based electronic market, the Intercontinental Exchange (nyse: ICE - news - people ), which in a few short months has captured more than a quarter of the share of daily trading in Nymex's benchmark oil contract.

Competition from ICE drove Nymex into the arms of the Merc earlier this year. Nymex is transitioning the trading of its big energy contracts onto Merc's electronic platform, where they will trade alongside Nymex's floor traders in New York."

[j korzeniowski]

admittedly, this is all over my head, but according to toronto's national post:

Chicago's two commodities exchanges are the world's biggest markets by far and are 2 1/2 times bigger than the New York Stock Exchange.

http://www.canada.com/nationalpost/columnists/story.html?id=dab0bbf4-9cbb-4c7d-9f84-600574b4d96e

anyways, like most chicagoans, i have an unhealthy level of civic pride for the city, and it is interesting to read about the newly created behemoth -- not that either exchange was small potatoes on their own.

[bnk]

That article is so good I had to post it.


TSX should take cue from Merc, CBOT

Diane Francis
Financial Post
Wednesday, October 18, 2006



Chicago's two commodities exchanges are the world's biggest markets by far and are 2 1/2 times bigger than the New York Stock Exchange.

This places the Second City (and my home town) ahead of the pack in terms of the global consolidation underway between the world's exchanges.

The Chicago Mercantile Exchange Holdings Inc. and CBOT Holdings, Inc. merger will create an exchange with a market capitalization value of US$25-billion. The NYSE is about US$9-billion. This may mean that another takeover is in the offing.

"It means that the hunter [NYSE] may become the hunted," said maverick Bay Street broker Tom Caldwell in an interview yesterday in New York City.

He and his clients are the largest shareholders in NYSE Group Inc. (3%) and have made tens of millions of dollars successfully anticipating other exchange seat/stock trends worldwide. Caldwell's group has holdings in Hong Kong, Johannesburg, London, Osaka, Toronto, CBOT Holdings, Inc. (the Chicago Board of Trade) and the International Stock Exchange.

"Exchanges are like buying toll roads," he told me in an interview this summer. "We like them."

The announcement yesterday rocked markets and knocked the NYSE stock which has been public since May.

The Chicago mega-merger is simply the latest in a global consolidation of exchanges.

The takeover fever began to spread in 2004 when Germany's Deutsche Borse bid for the London Stock Exchange. Rebuffed, Deutsche then bid this year for Euronext NV only to be rejected when the NYSE outbid it, offering US$10.22-billion. Euronext runs the smallish Paris, Brussels, Amsterdam and Lisbon stock exchanges.

Around the same time, Nasdaq approached London, was rejected but has acquired 24% of its stock -- an expensive proposition given that it has no access to LSE cash flow.

Likewise, the NYSE/Euronext merger proposal has been delayed for months as the French try to entice better offers and the Germans reconsider their bid.

Caldwell has never been a fan of the NYSE/Euronext deal, always preferring that the NYSE consolidate within the United States.

He told me the NYSE Group Inc. had been talking about merging with Chicago Mercantile Exchange Holdings Inc. He felt the company should be pursuing this plus concentrating on the maximization of its profitability.

Now it appears that if the NYSE fails to woo Euronext, it will become a takeover target by the Chicago exchanges.

"The NYSE has been fooling around in Europe and getting overtaken in Chicago," he said.

The Chicago deal is logical because each complements the other's product lines. The combined entity will offer the world's most extensive and diverse derivatives marketplace. The two combined have the highest volumes and values daily, totalling a staggering US$4.2-trillion a day.
In addition, they are the largest currency futures market, largest equity index market and leading regulated marketplace for foreign exchange derivatives trading.

So what does all this mean for a regional, specialized exchange like Toronto and its TSX?

Probably little.

There are foreign ownership restrictions protecting the market from takeover, and investors are relatively happy, thanks to a market capitalization riding high on commodity prices.

Alternatively, there are rumours about a deal with Brazil's bourse, but that should be a non-starter. Investing or doing deals with regimes in Latin America will not enhance the value or reputation of Toronto.

I think Toronto should embark on a strategy of becoming more aggressive in getting listings from American companies who cannot afford all the onerous regulatory requirements south of the border. Then it should consider taking over or doing a deal with the Australian exchange.

Not only are laws, and values, the same -- unlike Brazil's -- but the two would represent the world's foremost mining and resources exchange.

The biggest mistake would be for Toronto to do what seems to come naturally to all too many Bay Streeters, which is to play defence and hide behind protectionist barriers.

It's about time Toronto became a world capital in what this country does better than any nation: resources.

That doesn't sound politically correct, among the bleating Kyoto fans, but this country's living standards have been built and depend upon rocks, petroleum and trees.

So let's control their financial intermediaries and start to think like the denizens of the so-called Second City.

[the urban politician]

The CME-CBOT swallowing up the legendary NYSE?

If that ever happens, I will eat my wallet.

[Dolemite]

So much ass is getting kicked right now that my head is spinning


I agree. I was elated when I saw the headlines on websites yesterday. The front page of the Wall Street Journal meade me even more giddy :D

I believe that more money changes hands in Chicago, than any other city in the world. A combined CBOT and CME would make Chicago an even more powerful financial center...especially if they decide to go after another exchange (like ICE)

[Dolemite]

Well not quite, Chicago is leader in terms of derivatives. But you forget about the number one commodity oil. NYMEX and the London Petroleum Exchange are leaders forn respectively Sweet Crude and Brent.

Also London leads in terms of metals.

One question, I don't see how competition authorities in the US would allow such a monster merger to go ahead. Surely the merger would create a virtual monopoly in derivatives trading?


Uhh....I believe that LPE was bought out by ICE. The combined CME/CBOT entity is a potential suitor to the ICE, even moreso after this consolidation.

Also....more derivatives are traded privately or over the counter....you can't really call that a 'monopoly', especially when you consider the fact that there are plenty of alternaives (like Deutsche Borse AG and Euronext). CME and CBOT have different product lines, anyways.

[scribeman]

Does this make Wall Street the LaSalle street of the east? :D

[Dolemite]

The CME-CBOT swallowing up the legendary NYSE?

If that ever happens, I will eat my wallet.


Actually...I believe that there were talks of this a while back. CME certainly has a sufficient amount of cash on hand (at least prior to this CBOT/CME merger.) I believe that CME also looked into Deutsche Borse and LSE, also.

[Dolemite]

Does this make Wall Street the LaSalle street of the east? :D


Well..CBOE, CBOT and CME were always big players. New York is still the equity/underwriting capital of the world....Chicago is now the derivative capital of the world. And derivatives are becomming inceasingly important, to both investors and corporations that are looking for ways to hedge risk.

[Marcu]

Does this make Wall Street the LaSalle street of the east? :D

Wall street will continue to be synonymous with trading. Don't worry.

Chicago just made itself a first class city for trading. It can now be compared to Hong Kong and London, but New York will continue to dominate.

[scribeman]

Wall street will continue to be synonymous with trading. Don't worry.

Chicago just made itself a first class city for trading. It can now be compared to Hong Kong and London, but New York will continue to dominate.
Not really. The only thing NYC has for itself now is name recognition, and not even very much of that. It's no longer so above par that it matters. It's not even above par.

[Dolemite]

Wall street will continue to be synonymous with trading. Don't worry.

Chicago just made itself a first class city for trading. It can now be compared to Hong Kong and London, but New York will continue to dominate.

Again, different cities have their hands in different things. You really can't compare the Chicago derivative exchanges to equity exchanges in Tokyo or New York.

[Dolemite]

It would be pretty cool if they did go ahead with the whole chicago stock exchange thing,Daley did say he wants to make Chicago a GLOBAL city did'nt he?I think if they're interested in making alot of money and doing something really big for themselves and the city that they would look into a chicago stock exchange,now would be the time.


chicago has been a 'global city' for quite some time.

Alot of people seem to think that the Chicago became the derivative center of the world yesterday. Nothing has really changed since yesterday; In the long run, the 'married' CME-CBOT Holdings will be better situated.

[Mr Roboto]

Not really. The only thing NYC has for itself now is name recognition, and not even very much of that. It's no longer so above par that it matters. It's not even above par.

Dude.. are you serious?! Im sure that was just a joke.

This sounds like great news and everything, but I dont really understand the derivatives market and how it could be larger than commodities or stocks. Futures? I guess its great that Chicago leads in these.

Whatever helps this city economically sounds like good news.

[the urban politician]

Does this make Wall Street the LaSalle street of the east? :D

^ What interests me is all the talk recently about how Chicago's office district has drifted towards the west loop, and that LaSalle St has declined as its backbone, which is slowly being replaced by Wacker Dr.

But I wonder how all of this will change, since the Merc's trading floor will dissolve and it will likely move its offices into the CBOT building. This will once again make LaSalle the center of Chicago's financial machine, at least in one way.

There was actually an article about this in today's Crains, but I'm too lazy to post it. It said that Wacker will take a blow, but in the long run will still continue to bloom as an office district.

[scribeman]

Dude.. are you serious?! Im sure that was just a joke.

This sounds like great news and everything, but I dont really understand the derivatives market and how it could be larger than commodities or stocks. Futures? I guess its great that Chicago leads in these.

Whatever helps this city economically sounds like good news.
I don't know quite how to put this, but bear with me here.
A derivative market, at its core, is a bet against the appreciation or depreciation of an asset, such a stock/bond/property/whatever. There's a lot more that's involved in this, since legally a derivative contract grants both the both and liability to sell the future's underlying asset.
Chicago in effect just standardized what amounts to using New York brokers as snails in a race. Imagine how Wall Street must feel, with a bunch of hick Midwesterners using them like pawns :)

[Dolemite]

Dude.. are you serious?! Im sure that was just a joke.

This sounds like great news and everything, but I dont really understand the derivatives market and how it could be larger than commodities or stocks. Futures? I guess its great that Chicago leads in these.

Whatever helps this city economically sounds like good news.


Derivatives are are basically financial instruments that are based on the performance of an asset, index, or event (such as weather.) When you want to hedge risk, you could buy derivatives. A citrus company maybuy a derivavtive based on weather forecasts....which could predict them from a freeze. They are gaining in popularity, because hey offere some protection from fluctuations.

Stocks, on the other hand, represent ownership of assets.

[James Bond Agent 007]

I thought of a good name for this new combined entity: The "Chicago Commodities and Futures Exchange," or CCFE for short. :)

Now all we need is for LA to come up with its own big financial exchange: Maybe an exchange that trades movie star contracts, or futures contracts on the successes and failures of Hollywood movies. Or maybe something that trades options on Pacific Ocean wave heights. Or maybe an air-pollution rights exchange. :D

[Mr Roboto]

Thanks for the explanation guys. I guess this could be a big deal for Chicago, and that really is great news.

[Frankie]

Delivering on a dream
Merger secures Chicago's place as a worldwide trading center

By David Greising
Chief business correspondent
Published October 18, 2006

The leaders of Chicago's exchanges have long held an ambition: to make this city a global financial capital on a par with New York and London.

They may never achieve that lofty goal, but the $8 billion merger announced Tuesday between the Chicago Mercantile Exchange and the Chicago Board of Trade gets close. It assures Chicago's future as one of the world's trading centers.
Not so long ago, such staying power was by no means assured.

"It's almost an impossible dream come true," said Leo Melamed, who remains the Merc's guiding force 30 years after he helped transform it from its roots as a butter-and-egg exchange into a hothouse for innovation.

The deal is such a dream for Melamed and the thousands of people in the Chicago markets because prospects in recent years had sometimes seemed nightmarish. Until recently, the Chicago exchanges looked as if they might lose their leadership positions.

Electronic trading threatened to make Chicago's trading pits obsolete. But the threat went beyond merely endangering the shouting, jostling and colorful dress that were a Chicago trademark worldwide. Automated trading made it easier for major exchanges to compete against Chicago, and Chicago's pits were ill-equipped to take them on.

As markets in London and Frankfurt improved their electronic capabilities during the 1990s, they developed into threats to Chicago's very future as a global capital center. In large part that was because, for far too long, Chicago's pit traders viewed electronic markets as, at best, a necessary evil, if not an outright threat.

Almost overnight, the Chicago markets seemed out of date and overmatched. Germany's all-electronic Eurex eclipsed Chicago's markets for the first time in 1999. Seat prices on both Chicago exchanges plummeted, even as traders dug in to resist automation. By the time the Board of Trade reluctantly and grudgingly decided it needed to move some trading onto computers, it was forced to turn to Eurex to provide the electronic backbone for its markets.

The Eurex-Board of Trade alignment was doomed. But after it broke down, the Germans didn't just go away. Instead, they announced plans to attack the U.S. markets, to launch all-electronic versions of the Board of Trade's bellwether Treasury bond futures contract and go toe to toe with the exchanges that invented the business.

Key developments saved the Chicago exchanges and gave them a second chance. New leaders threw out old assumptions and adopted innovations. Public stock ownership gave the Chicago exchanges the needed capital to do a deal. And, late as it came, the embrace of technology put Chicago back in its historic role as a global leader.

The exchanges' new leadership emerged to provide savvy creativity and political will to move the exchanges where they needed to go. At the Merc, then-Chief Executive James McNulty persuaded members in 2002 to convert from a clubby, members-only control to an investor-owned, somewhat independently governed institution.

At the Board of Trade, a third-generation grain trader, Charlie Carey, emerged as an unlikely visionary. Beefy and gruff-voiced, raised on the South Side and steeped in the old-style ways of Chicago's markets, Carey broke down the resistance to electronic trading in a Nixon-goes-to-China kind of way.

A corn trader most of his career, Carey also guided the CBOT's conversion to a modern ownership structure. He helped CBOT members see the future not as something to be feared, but as an opportunity to grasp.

The change in ownership structure cannot be underestimated as a factor in the Chicago exchanges' rejuvenation. The Merc's initial public offering at the very end of 2002 was a watershed. It occurred at a time when the trading floors were emptying, and the future looked uncertain.

Against all odds, the stock took off. It hurtled from its opening of $35 a share to its current price of around $516 a share, a Google-like trajectory that outran even the most optimistic projections.

The Board of Trade took notice and followed suit. Political resistance and a complicated legal battle with its sibling Chicago Board Options Exchange delayed the move, but the CBOT last year finally went ahead with its own stock offering.

When the Board and the Merc first started talking merger in June 2005, they couldn't get past a stumbling block. Because the CBOT was privately held, there was no way to price the value of the exchange. But the public stock offering put a price tag on the CBOT.

"We had a lot of hurdles to clear," Carey said. For starters, "We had no currency until the last year," he said.

Joined together, the two exchanges believe they can overpower any exchange, anywhere in the world. They'll have the biggest volume, by far. They plan to cut $125 million in costs over the next two years. They believe the Merc will bring new financial discipline to the Board of Trade, and together they'll earn a 37 percent profit margin, a boost from current margins for each.

Why has the Merc stock done so well, and why did the CBOT remain attractive after all the years of hesitation and infighting? Because of electronic trading.

After all these years of fear and loathing, it's hard to overstate the irony that electronic trading would emerge as the great salvation of the Chicago futures markets.

The Chicago trading floors are much quieter and emptier these days compared with their legacy of frenetic shouting amid the hurly-burly of raw commerce. But that's because the action is now upstairs, where people sit before computers and trade. Some work in solitude, others in front of large banks of computers, replicating the feeling of crowds that can be such an intrinsic part of trading. In some cases, they even have sound piped in, rising and falling in sync with trading volume, the better to mimic the sensory input of the trading floor.

Trading volume in Chicago, fueled by the migration to computers, has soared, forcing foreign competitors to scale back their attacks on the city's markets.

To Melamed, computers represent a powerful opportunity for Chicago. He estimates that Chicago could net as many as five new technology-based jobs to replace every floor trader from the pits.

"There is no question that Chicago will remain the capital of derivatives trading, the capital of risk management," Melamed said. "This deal will electrify business in Chicago."


Copyright © 2006, Chicago Tribune

[left of center]

^ i read about this yesterday. unbelievable. just... unbelievable! i hope the Board of Trade wont just dissapear under the Merc banner, but rather, they keep both names around, atleast for sentimental reasons. Both names are so iconic in Chicago history, it would be a shame to lose one of them.

Chicago is poised to grow as a center of finance now, big time. Time to start acquiring some exchanges ;)

[chi-townJay]

i hope they put up some obeliks like in NYC after its all said and done.

[donybrx]

Any job losses projected as a consequence?

[chicubs111]

any intial job losses from the merger will be replaced by more job gains in the long run by far

[chi-townJay]

CBOE merger, sale talk heats up
Merc-Board of Trade deal puts new focus on options exchange

By Susan Diesenhouse
Tribune staff reporter
Published October 19, 2006


Speculation that the CBOE, the nation's largest options exchange, will be purchased or merged with another financial marketplace has intensified since Tuesday's announcement that the city's two other big exchanges plan to pair up.

The Chicago Mercantile Exchange's $8 billion deal to buy the Chicago Board of Trade would make the $25 billion CME Group Inc. the world's largest futures exchange. Having such a dominant financial market here, investors and traders say, will focus the financial world's attention on the value of acquiring or merging with Chicago's third big exchange, the Chicago Board Options Exchange.
This week, "the CBOE's value has increased dramatically," said Jon Najarian, a co-founder of OptionsMonster.com, a financial information service.

Part of the CBOE's allure is that "it offers everything: options, futures and soon stocks," added Najarian, whose firm is a member of the CBOE, Board of Trade and New York Stock Exchange.

In the 1970s the Board of Trade created the options exchange as a venue for trading contracts based on equities. Those agreements give the holder the right, or option--but not the obligation--to buy or sell a stock at a set price before a set time. In contrast, a futures contract is an obligation to sell at a set time and set price.

On Wednesday, a seat on the CBOE sold for a new high price of $1.505 million, $120,000 more than just a week before the Merc's acquisition announcement. The high price for a CBOE seat has jumped 72 percent this year. In 2001, the best seat price was $400,000, according to the Options Clearing Corp., an industry clearinghouse.

The rising value placed on the options exchange has been fueled by a number of factors. As various financial exchanges have gone public, investors have plunged in with a frenzy, driving up share prices. They expect the same to occur at the CBOE, if it decides to become a for-profit corporation and sell stock to the public.

At the same time, the options business has become one of the fastest-growing sectors of the U.S. securities industry.

Meanwhile, the CBOE's own performance has been on an upswing. The average daily volume of contracts it traded so far in 2006 is 2.6 million, up almost 50 percent from a year earlier. That brought its market share of trading in U.S. listed options to 33.65 percent so far this year, up from 31.13 percent in 2005.

But most important, the combination of the Merc and the CBOT makes it more likely that the Board of Trade will resolve a long-standing trading rights dispute with the options exchange, said Ryan Caldwell, portfolio manager of the Asset Strategy Fund of Waddell & Reed Inc. in Kansas City, Kan.

"I think this deal will motivate the CBOT to clean up the issue faster," he said.

In August, the Board of Trade filed a lawsuit to assure that if the CBOE becomes a for-profit corporation or is sold, Board of Trade members will retain whatever trading rights and ownership stake they believe was granted to them in the 1970s when the Board of Trade spun off the CBOE. The suit is pending.

Now more measured negotiations may be in order.

In the summer, "The CBOT was hunkering down for a fight," Caldwell said. "But that's no longer in their interest because closing the deal with the CME is far more important."

Not only is the trading rights battle a distraction, it may damage CME's future plans to bring the CBOE into its orbit, said Tony McCormick, a vice president for equities and options trading at Charles Schwab & Co.

Until the trading rights issue is resolved, it is unclear whether Board of Trade members have an ownership stake in the options exchange and if so, exactly how much.

Once the trading rights issue is resolved, the CBOE can proceed with plans to convert to a for-profit stock corporation from a member-owned non-profit. That paves the way for it to do a public stock offering if it chooses. Then Wall Street will be able to measure its value as reflected in the stock price. That gives the CBOE a currency for merging or being acquired by another exchange.

For the potentially mammoth CME Group, the CBOE could be a tasty treat, said McCormick.

"It offers the CME Group something new as the third member of the Chicago triumvirate," he said. "It allows them to enter the equity and equities derivative world."

In July, the CBOE announced plans for a new equities market for trading products offered on the New York Stock Exchange, the Nasdaq stock market and the American Stock Exchange.

Should the Merc/Board of Trade pair view the CBOE as a future takeover target, said McCormick, "Business logic dictates that they peacefully resolve a dispute with a potential partner."

----------

sdiesenhouse@tribune.com



Copyright © 2006, Chicago Tribune


This is the fucking takeover we've been waiting for in Chicago,i wonder if daley had a hand in this.

[chicubs111]

It makes sense ..they should get the third chicago exchange before someone else grabs it..then after these three exchanges combine...chicago can take over anyone else it wants...lol

[Taft]

^ i read about this yesterday. unbelievable. just... unbelievable! i hope the Board of Trade wont just dissapear under the Merc banner, but rather, they keep both names around, atleast for sentimental reasons. Both names are so iconic in Chicago history, it would be a shame to lose one of them.

Chicago is poised to grow as a center of finance now, big time. Time to start acquiring some exchanges ;)

I am also afraid the CBOT name will be lost in this deal.

At the very least, I'd like to see the CBOT building's name maintained. It is such a legendary piece of Chicago's architecture and skyline; an anchor point for the La Salle street canyon view. To rename it--especially to the CME or Merc building--would be sacrilege. I work for a trading firm in the Board of Trade building and love the fact that I'm connected to Chicago history on a daily basis (even if only on a voyeur basis).

This deal is great if only because it solidifies Chicago as a future player in the world economy. Buyouts have effectively been killed for the forseeable future and Chicago's position as a leader in derivatives markets is preserved.

As for the importance of futures...though equities (stocks and such) are still the investment of choice for consumers, *all* big players in the trading industry rely on derivatives for the backbone of their portfolios. From small trading shops, to mutual funds to investment banks, derivative products are essential. Even as a consumer, if you look closely at the details of many popular investment vehicles, you'll see futures and options play a big part of how those vehicles earn money. If you invest (even 401Ks, etc.), there is a very good chance someone owns derivatives on your behalf.

Derivatives are really a "big deal." It is wonderful Chicago will maintain its elite status in this market.

Taft

[Kevin J]

I'm interested in what this means for the central Loop. The subject was touched on in a few posts above, but the move of the Merc into the Board of Trade complex solidifies one of the last remaining anchors on LaSalle Street. This combined with the recently approved Central Loop TIF district will mean that the grand old buildings on LaSalle will see both an influx of capital for rehabs and renewed demand for space for firms that need to be close to the CME.

I'm sure the big law firms and other professional service firms will continue migrating west, but with the east Loop going increasingly academic and residential, the central Loop will be better positioned to be the choice for more of the meat and potatoes tenants.

[chicubs111]

Chicago: New Financial Capital of the World?

By Fred Yager
ConsumerAffairs.Com

October 19, 2006
Personal Finance
• Derivatives -- the Next Economic Meltdown?
• The Virtual World of Exchange Traded Funds
• Schwab Pressured by Cheaper Deals from Big Players
• Hedge Funds Riskier Than Ever
• Lawsuit Charges Rampant Mutual Fund Timing at Seligman
• Federated Settles Mutual Fund Timing Probe
• PBHG Agrees to Refund $120 Million to Investors
• Spitzer Spoils Bank of America's Party
---
• More Personal Finance News

All it took was the Chicago Mercantile Exchange joining forces with the Chicago Board of Trade and Bam! -- Chicago, not New York, becomes the largest financial market in the world once the merger is approved.

It's all because of derivatives, a sophisticated and controversial investment product that few people outside financial services even understand.

Sometime in the past 20 years, more money started pouring into derivatives than all the stocks, bonds and any other investment vehicle you can think of.

The two Chicago markets have a combined market value of $26 billion, and the underlying value of contracts they trade daily is a gigantic $4.2 trillion. Yes, that's trillion with a "t" making derivatives the dominating ruler of capital around the world -- even though some investors think they're dangerous.

One investor who issued an early warning about derivative is Warren Buffet, the so called "Oracle of Omaha" who runs one of the largest conglomerates in the world, Berkshire Hathaway. Buffet calls derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal ? time bombs, both for the parties that deal in them and the economic system."

If that's so, how come they're so popular? In order to answer that question, let's take a look at what derivatives are.

What They Are
The word "derivatives" actually is actually a generic term that refers to an assortment of financial products that work like contracts. They "derive" their value from movements in things like stocks, or bonds, currencies, interest rates, commodities, and just about anything you can think of.

You "bet" that the value from the underlying asset will either increase or decrease (that's right, you can profit by someone's loss) by a certain amount within a fixed period of time, sometimes lasting 20 years. This value can be tied to a number of variables including the creditworthiness of the underlying assets.

Got it? No?

That's okay. Most people working in this business have advanced degrees in mathematical finance. You have to know about arbitrage theory in continuous time, or one-step binomial tree models, and risk-neutral valuation. Does your head hurt yet? If you didn't take advanced calculus, you may want to stop now and go back to enjoying life.

On the other hand, it's not necessary to know how a car's engine works in order to drive and enjoy one. So try to think of derivatives in the same light, otherwise your head will explode trying to comprehend the inner workings of the financial equivalent of quantum physics.

Options and Futures
The oldest and perhaps still most popular of all derivatives are options and futures. They give investors the option to buy or sell something at a later price. In this regard, they're used to hedge risk so they're used by hedge funds, pension funds, mutual funds and even some individual investors.

The recent popularity of hedge funds played a fairly large role in the surge in derivatives trading volume. Exchanges like the Chicago Mercantile Exchange and Board of Trade saw an opportunity and responded to the demand from hedge funds.

Unlike stocks and bonds, a derivative contract is a promise and the legal terms of a contract are much more varied and flexible than the terms of direct asset ownership. Actually, it's the flexibility aspect of derivatives along with their leveraging ability that makes them so popular. It's also, according to some, what makes them so dangerous.

In terms of leverage, derivatives have the ability to grow 100% in a matter of days, while the underlying security only rises a modest 10%.

Let's compare this to getting a mortgage. In order to buy a house for $100,000, you put down $10,000 and borrow $90,000 from the bank. Six months later, you sell the house for $150,000, pay back the $90,000 you owed the bank, plus interest, which is small because you only had the house for six months, and keep the rest which is nearly $60,000.

That's not a bad return for a $10,000 investment and that's the same way many derivatives work.

Leverage Works Both Ways
On the other hand, such leverage can get you into big trouble if the value of the house or underlying asset goes down. Such a scenario caused panic in the global markets a few years ago when a Greenwich, CT-based hedge fund, Long Term Capital Management, was over-leveraging something called "total return swaps" that allow for 100% leverage.

The fund had borrowed more than $100 billion on a small amount of equity capital the same year Russia defaulted its sovereign debt and Asian was in a financial crisis. Long Term Capital's derivatives went into a tailspin and the impending loss of an estimated $1 trillion threatened a number of major investment banking groups so the Federal Reserve Bank initiated a rescue operation to avoid an international catastrophe.

Despite such "meltdowns" the derivatives market continued to flourish.

In the early 2000s, stock trading was about to enter a bear market. That's when the two Chicago exchanges' saw their derivatives business really grow hedge funds shifted their bets into those markets that were doing well, such as bonds, foreign currencies and commodities.

The Chicago exchanges got another boost after the Enron collapse, which put the spotlight on the danger of private derivative deals that could prove worthless if a company defaulted on its obligations like Enron did.

A few years ago, Warren Buffet gave a speech in which he said that unless derivatives contracts are guaranteed, their ultimate value will depend on the "creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses -- often huge in amount -- in their current earnings statements without so much as a penny changing hands."

Clear and Present Danger
He also predicted that derivatives will multiply in variety and number until "some event makes their toxicity clear."

We already know how dangerous derivatives are, yet we seem unable to stay away from them. They are almost like a drug on the economy to which we have all become addicted and that drug is the notion of fast and easy money. Well as they used to say, "easy come, easy go."

Let's start a countdown to how long Chicago, the derivatives capital of the world, will remain the financial capital because it's just one "meltdown" away from losing that title.

What's frightening, however, is pondering how many it will take down with it.

http://www.consumeraffairs.com/news04/2006/10/derivatives.html

[the urban politician]

^ I'm not a financial expert, but I sensed a bit of antagonism toward's Chicago's recent success near the end of the above article. I wonder if the author is just another New Yorker who can't stand the idea of another city than his own playing a major role in global finance.

I say that because of this--as "risky" as derivatives are, are we not forgetting that several stock market crashes have lead to global economic depression in the past century? I refer most to the stock market crash of 1929, which followed a decade of speculative growth that flew off the handle. Seems like there was a lot of "quick money" being made in those days, as well.

Again, I'm not a financial expert, but in light of this knowledge is it fair to dismiss Chicago's exchanges that easily?

[Taft]

Chicago: New Financial Capital of the World?

By Fred Yager
ConsumerAffairs.Com


That article is a mess.

First, their coverage of why derivatives are "risky" is a bit shaky. Their levarge argument is relatively accurate: derivatives allow you to invest a small amount and get returns or losses many times the amount of your investment. However, if you understand derivatives, you realize the amount of risk you put yourself in and don't overextend yourself. Also, competent investors can use derivatives to provide stability in their portfolios, mitigating any risk created by buying a particular derivative outright. The bottom line is that competent derivatives investors can easily prevent blowouts.

Second, their use of Long Term Capital Management as a case study for "meltdowns" is hopelessly incomplete. As one of the largest events ever to occur in derivative trading, countless books have been written about LTCM and their blowout. The bottom line here is that their case is complicated and an example of what not to do. Putting yourself in the position of LTCM is much harder these days. Further, look at the impact of LTCM on the world markets. Compare that to, let's say, the depression (caused by "traditional" investment vehicles).

Finally, their reliance on Warren Buffet is humerous. Not only is he one of the only large investors out ther making such chicken little statements about derivatives, but he doesn't even follow his own advice. From his own mouth, we know not only that he uses derivatives in his portfolios and strategies, but that he doesn't think they are difficult investment vehicles. Given his quiet nature, we may never know why Buffet issued those statements in Berkshire financial postings. What we do know, however, is that his words belie his actions. More here: http://www.capmag.com/article.asp?ID=2531

I've been in the trading industry for a while and have seen various journalists and advisors rail against derivatives in the past. Most of their arguments against derivatives are baseless and fear mongering BS.

Currently, my livelihood is dependent on the viability of the derivative markets. From my experience in the industry, I am not worried about the scenarios presented in this article.

Taft

[Taft]

Again, I'm not a financial expert, but in light of this knowledge is it fair to dismiss Chicago's exchanges that easily?

No.

You hit the nail on the head with your comparison to crashes in worldwide markets. IMO, healthy derivatives markets provide investors more ways to mitigate risk from large scale downturns in other markets. For example, if you are holding assets which are particularly sensitive to interest rate fluctuations you might aquire interest rate futures to mitigate the risk of rates to those assets.

True, we can't prevent idiot investors from throwing their money away with bad derivatives trades. However, regulation and increased clearing house and brokerage oversight is making it more difficult to overextend yourself and helps to make Long Term Capital Management type events less likely.

Taft

[Marcu]

Derivatives are much more flexible since one can pretty much contract into and out of anything. Stocks are like a packaged product. You buy what's on the shelf - the company.

The problem with the "shelf" product is one is forced to rely on the Board and Management to assure them that they are receiving accurate information about the product...the company. In most companies the Board is 1/3 management and 2/3 "outsiders" or CEOs of other companies. So essentially, there is no management acocuntability and more often than not that information is at least somewhat innacurate. This might not make stocks more volitle, but it certainly makes investing in them just as much of a "bet" as an investment (except most people win in the long run).

[Kevin J]

^ I'm not a financial expert, but I sensed a bit of antagonism toward's Chicago's recent success near the end of the above article. I wonder if the author is just another New Yorker who can't stand the idea of another city than his own playing a major role in global finance.

I say that because of this--as "risky" as derivatives are, are we not forgetting that several stock market crashes have lead to global economic depression in the past century? I refer most to the stock market crash of 1929, which followed a decade of speculative growth that flew off the handle. Seems like there was a lot of "quick money" being made in those days, as well.

Again, I'm not a financial expert, but in light of this knowledge is it fair to dismiss Chicago's exchanges that easily?

I think the palpable antagonism to which you refer is not anti-Chicago at all, but anti-derivatives. The article was written for consumeraffairs.com, which implies that the editorial bent of their articles would lean towards consumer watchdog type of coverage. That idea is borne out by how the article portrays derivatives as a seemingly tame tiger that will eventually maul its tamer, with major fallout for the average consumer, who like most of us don't even know or understand this multi-trillion dollar process that's going on around us.

I'm not endorsing what the guy is saying. I don't understand enough about it to evaluate it, but the guys on this board who do understand it are handling the evaluation just fine. I just don't think the piece has anything to do with anti-Chicago bias. If anything, the writer's message seems to be, "Poor Chicago. They think they're king of the world with this deal, but they're living in an elaborate sand castle that could be washed out to sea at any moment." Again, a message that has to be taken with a grain of salt given that the writer has a pro-consumer (and thus anti-big business) bias.

[the urban politician]

Any commentary by our inhouse panel of experts on this article below? Just curious--what are the chances that the Merc's stocks will take a bit of a tumble, and how likely would it be that this merger would be called off if that were to take place? I ask this because wouldn't CBOT's investers see the long-term growth potential of a combined CME-CBOT entity as more important than immediate stock value? Again, pardon my rather amateur (if even that) knowledge of this topic:


http://www.chicagobusiness.com/cgi-bin/news.pl?id=22527
Oct. 20, 2006
By Paul Merrion

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CBOT isn't hedging on merger value
(Crain's) — The merger agreement that is to create the world's largest futures exchange does nothing to hedge a big risk to the Chicago Board of Trade: a drop in the purchase price.

In the deal announced Tuesday, Chicago Mercantile Exchange Holdings Inc. has agreed to acquire CBOT Holdings Inc. for $8 billion in stock and cash.

But that price could drop if the value of CME's stock falls between now and mid-2007, when the merger is expected to close. That's because the agreement doesn't put a minimum value, or collar, on CME's stock price.

CBOT shareholders have so far expressed approval of the deal, but a lower purchase price could change that, and even open the door for another bidder.

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"CME is such a stock market darling, I find it difficult to believe it will fall out of favor," says Patrick Young, a London-based futures industry consultant. But if it did, "it would be an opening for other people to come in."

Each CBOT share will be exchanged for 0.3006 shares of CME stock, or the equivalent in cash up to a total of $3 billion, based on the price of CME's stock just before the merger closes.

With CME shares trading at a recent $501, or 44 times the exchange's projected 2006 earnings, any misstep could lead to a significant drop.

If CME's share price skids, "there's no question something like that would change the deal," says Michael Manning, president of Rand Financial Services Inc., a clearing firm on both exchanges. "But I think the Merc could easily be worth more than $500" a share.

Says former CBOT president Thomas Donovan: "Money is going to be the driver. It (the deal's value) drops a lot, it could cause people to look at it again."

CBOT officials are barred from soliciting other buyers, and the merger agreement also contains a $240-million breakup fee to dissuade potential counter-bidders.

However, if the CME's stock declines by a mere 3% — taking it to about $485, a price it was trading at less than a month ago — that would reduce the purchase price enough to offset the breakup fee.

CBOT Chairman Charles Carey concedes that a lower price could spark other bids. “I can’t control that. This was our best strategic alternative.”

If other bids come in, “we’d have to evaluate who it’s coming from, whether it has the same synergies, would it be a merger that would work. If prices go down, you look at it and evaluate it,” Mr. Carey says.

Some people he’s talked to on the floor “don’t understand this is strategic. We’re not selling out. I don’t know who else you could sell to that would be as strategic and simple to integrate.”

The thinking was that a collar on the deal “wasn’t necessary,” he adds. Besides, “it would have been expensive” to gain that concession from the Merc, resulting in a lower price or less ownership for CBOT shareholders in the combined entity. Also, “we felt it would cap the upside of the deal.”

“There are no restrictions,” says Mr. Carey. “If people are concerned about the downside they can sell now.”

[brian_b]

Perhaps CBOT should purchase some derivatives to hedge their risk of a potential CME stock price decline.

[chicubs111]

dont know if this was posted earlier...

Chicago struts financial stuff with CME/CBOT deal

PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Ann Keeton
Last Update: 6:36 PM ET Oct 17, 2006


CHICAGO (MarketWatch) -- A merger resulting in the world's biggest futures trading exchange will help bolster Chicago's reputation as a broad-shouldered financial center.
Chicago Mercantile Exchange Holdings Inc. (CME) said Tuesday it will buy CBOT Holdings Inc. (BOT), parent of the Chicago Board of Trade, for $8 billion, in a deal that's expected to close in mid-2007. The new company, to be called CME Group, Inc., will have dominant positions in trading of futures contracts tied to interest rates, stock indexes, currencies and several commodities products.
The CME/CBOT merger "solidifies the role of Chicago as a major financial center in the U.S.," said William Cline, a managing director with Accenture Ltd. (ACN), a global consultancy. The combined exchange is likely to keep growing, he said, as consolidation of trading exchanges continues both within and outside the U.S.
The merger comes at a time when trading in derivatives has grown exponentially, as investors increasingly seek out ways to hedge their exposure to price fluctuations in various assets, whether its stocks, bonds or crude oil. Increased activity by hedge funds looking to profit on price fluctuations has also boosted market liquidity.
Chicago is the unquestioned headquarters for trading of derivatives, and Tuesday's deal enhances the financial profile of a city that plays second fiddle to New York as a home to top-tier banks and brokerages.
While the growth of traditional stock exchanges is slowing, "Derivatives and the other products at the Chicago exchanges are the growth products of the future," said Paul O'Connor, director of World Business Chicago, a non-profit economic development corporation. "These products are critical for the developing world, to stabilize growing economies such as in China."
"There was a danger that the Chicago exchanges would be gobbled up by financial institutions outside of Chicago," O'Connor said. "Now, we're breathing a huge sigh of relief."
Chicago in 2005 was home to 64% of all U.S. futures and options trading, compared with 25% for New York, which ranked second, according to data from World Business Chicago, a non-profit group that promotes local business development.
While Chicago has a diverse economy, with a leading position in business consulting and transportation, the city bows to the Big Apple when it comes the number of financial businesses based here.
Among its financial businesses, Chicago is home to insurance giants Aon Corp. (AOC), Allstate Corp. (ALL) and CNA Financial Corp. (CNA), as well as a growing number of private equity groups and hedge and mutual fund companies.
"MBA grads view Wall Street as the top place to go for banking and finance careers," said Jean-Pierre Dube, professor of marketing at the University of Chicago Graduate School of Business. "There is a financial community in Chicago for banking, finance, and even private equity, but sometimes people overlook that," Dube said. "To the extent you can convince people that Chicago is a place for finance, you can persuade talented people to stay here."
The CME-CBOT merger may result in a few lost jobs, but mostly the exchanges' trading businesses don't overlap. CME said it plans to move its floor traders a few blocks up the street to the CBOT, which has some spare room; the CBOT owns its building, a landmark art deco skyscraper, while the CME rents floor-trading space.
Executives from CME and CBOT on Tuesday said that the merger will result in annual cost savings of $125 million in the second full year after closing of the deal, thanks to integration of trading floors and of electronic trading systems.
Exchange executives said the deal lays the groundwork for continued growth in the increasingly competitive global landscape, though they hinted that no other acquisitions would take place for the next two years.
The Chicago exchanges, which started operations in the 19th century as places for farmers to sell agricultural products, have been instrumental in developing the products and electronic trading platforms that have sparked the recent boom in derivatives trading.
Jack Sandner, retired chairman of the CME, noted at a press conference that the poet, Carl Sandburg, once dubbed Chicago "hog butcher to the world." Now, he said, the city will be known as the risk manager of the world.
The surge in trading volume has helped spur significant revenue growth in recent quarters and pushed share prices in CME and CBOT to record levels. CME shares on Tuesday hit an all-time high of $535.01 while CBOT hit a record of $159.49.
Abol Jalilvand, dean of Loyola University of Chicago's School of Business Administration, said Tuesday that once the companies are merged they will have more leverage to pursue further acquisitions and add more products.
It's "the first step to becoming a threat to the New York Stock Exchange," he predicted.
NYSE Group Inc. (NYX), in part because of the competitive threat posed by the growth of the Chicago exchanges in recent years, is pursuing a merger with Euronext NV (29064.AE). NYSE, which last year acquired Chicago electronic-exchange operator Archipelago, would not only boost its stock trading through a deal with Euronext, but would also gain a foothold in the growing market for derivatives trading.
-By Ann Keeton; Dow Jones Newswires

http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7B02397793-9DA0-4C71-93C5-3F14073ABA27%7D&keyword=

[chicubs111]

sorry..double post

[chicubs111]

RISK MANAGEMENT

Banking on a new kind of money power base

By Becky Yerak
Tribune staff reporter
Published October 22, 2006


For a city that is the third biggest in the nation, Chicago's financial-services industry comes across sometimes as a two-bit player.

New Yorkers, Canadians and the Dutch own the top banks in the Windy City. Once-sizable mutual funds are shadows of their former selves. And the entire state of Illinois accounts for just 1 percent of investments in the U.S. venture capital industry, an early source of funding for start-up businesses.

When the Chicago Board of Trade and the Chicago Mercantile Exchange agreed to merge last week, concerns that the city's futures trading industry could go the way of its banking business were quelled.

The consolidation of the two Chicago-based exchanges ensures that the city becomes the undisputed power base of the risk management industry at a time when the rest of the world has been making inroads. The deal is seen as building a drawbridge discouraging New York, European or Asian firms that might have been mulling separate merger overtures to the Chicago exchanges.

"Had they been gobbled up separately, that would have hurt us," said Paul O'Connor, executive director for World Business Chicago, an economic development group. "It would have been like the loss of a major airline."

Chicago financial observers also believe the deal will act as a magnet, attracting additional trading-related businesses, and improve recruiting efforts.

Job candidates on the coasts still tend to think that "the West Coast is a technology mecca, and finance people tend to think of the East Coast as the place to be," said Ilya Talman, of Chicago-based Roy Talman & Associates, which specializes in financial technology recruitment searches. The merger could change that perception, he said.

The exchanges' elevated status might be one of Chicago's last great hopes to put itself on the map as a financial player on par with London and New York.

To be sure, Chicago's financial-services sector continues to evolve, even grow. Employment in the finance, insurance, credit, securities, commodities and investment sectors in the Chicago-Naperville-Joliet area, excluding Lake County, grew 7.7 percent from 1990 to 2005, according to the Bureau of Labor Statistics.

The city has led the nation in the number of new bank branches in seven of the past 10 years, with more than 250 banks competing for consumers' business.



Rude awakening

But for Chicagoans with civic pride in their financial services, the 1998 acquisition of the last major Chicago bank left standing was a rude awakening. The purchase of First Chicago NBD Corp. by Bank One Corp., which in turn was bought by JPMorgan Chase & Co. in 2004, was the industry's equivalent of Macy's usurping Marshall Field's.

"It was a Chicago institution that became a Columbus, Ohio, institution, that became a New York institution," said Don Phillips, managing director for Morningstar Inc., a Chicago-based investment research firm. "It's a pattern we've often seen."

In the mutual fund sector, Kemper and Stein Roe once had meaningful operations in Chicago, but their presence has since shrunk, Phillips said, noting that Kemper is now part of Scudder and the Stein Roe brand has been deemphasized. "It's part of the trends in mergers where you see a power base shift from the city."

The city has some "wonderful, smaller" mutual fund firms, including Harris Associates and Ariel Capital Management, Phillips said, "but none of them have the scope of Kemper and Stein Roe."

Chicago is home to several respected midsize private equity firms that are boosting their latest fundraising by as much as 50 percent.

"We're certainly not New York, where there are 8 zillion hedge funds, but we have really well-run, strong private equity firms here--Willis Stein, Golder Rauner, Madison Dearborn," said Thomas Wilson, Northbrook-based Allstate Corp.'s president and soon to be its chief executive, in an interview last winter.

"We have some massive asset management companies, and yet Chicago gets overlooked as a financial center," Wilson said.



Alternative investments

But Chicago does lack private equity megafirms, those raising tens of billions from investors to deploy in record-breaking deals.

The city has a growing hedge fund industry, and the merger could even lure hedge funds to Chicago from other parts of the country, said Abol Jalilvand, dean of Loyola University Chicago's business school.

"By definition hedge funds take high risks, and they want effective and cheap ways to manage those risks," he said.

Currently, Chicago is headquarters to some of the hedge fund world's biggest "funds of funds," basically the industry's version of a mutual fund that invests in individual hedge funds.

"From a fund-of-funds perspective, Chicago is fairly large," said Stephen Vogt, chief investment officer for Mesirow Financial's hedge fund division.

Last month the publication InvestHedge compiled a list of hedge funds of funds with more than $1 billion in assets under management as of June 30. Chicago funds making the cut are Grosvenor Capital, ranked 10th with $17 billion in assets; Mesirow Advanced Strategies, ranked 19th with $10 billion; and Harris Alternatives, ranked 22nd with $8 billion.

Mesirow Advanced was started in 1984. In 2000 it had 19 employees, and today it has nearly 70, half of whom are devoted solely to hedge fund research.

"From the hedge fund perspective, Chicago has a good, modest industry that's growing and has some high-quality funds, but Chicago does not produce the number of hedge funds that New York or even San Francisco does," Vogt said.

Chicago boasts only one of the world's 100 biggest hedge funds, Citadel Investment Group, a claim that can also be made by such smaller cities as St. Francis, Wis.

"In alternative investments in general, Chicago has generally been behind Boston and New York and probably San Francisco," said a chief investment officer for an institution that prefers not to be named.

"Chicago has always been a center for futures and commodities trading and is very strong in real estate, but there are not nearly as many strong private equity firms as in Boston and New York, and hedge funds are pretty limited," he said.

Some Chicagoans believe worries over whether the city has a lot of major homegrown players in the financial sector are overblown, saying Chicago's economic diversity insulates it from a financial doomsday that areas such as Silicon Valley have experienced.

"We may not be as strong in financial services as London or New York, but we're not a trivial player, said Morningstar's Phillips. "We saw the pain inflicted on Silicon Valley when the tech industry collapsed."

Generally, it's helpful for any city to have a large locally based bank, one banking executive said.

"When the board and management are here they tend to be more active in the community and more in tune with the local market," said James Giancola, CEO of Melrose Park-based Midwest Banc Holdings Inc. "And the profits get shared with shareholders here, as opposed to Canada, New York City and Europe."

But Giancola allowed that Dutch-owned "LaSalle is very tuned into Chicago."

And being the home to big industry players is not a guaranteed employment panacea.

Illinois, and especially the Chicago area, can lay claim to some of the biggest names in the insurance business. Bloomington-based State Farm and Allstate are the nation's No. 1 and No. 2 home and auto insurers, respectively. Two of the top five insurance brokers, Aon Corp. and Arthur J. Gallagher & Co., also are based in the area.

But area jobs at insurance carriers have dwindled by 10 percent since 1990, according to government statistics.

Similarly, even New York's dominance in the securities industry shows signs of slipping. New securities industry jobs created in New York since the 1987 stock market crash represent only 9.2 percent of the 313,800 such jobs created in the other 49 states. New York's share of U.S. securities industry jobs dropped from 32 percent in 1992 to 25 percent in 2006, Bureau of Labor Statistics numbers show.

"With immediate communications and the ability to transfer money in an instant, the market for financial services has changed greatly in the past 20 to 25 years," said Robert Hamada, professor emeritus of finance at the University of Chicago's graduate business school and a former director at the Chicago Board of Trade.

"It used to be a local market, then maybe a Midwest market, then it grew into a national market, and now without question it's a global market," he said.

----------

byerak@tribune.com
http://www.chicagotribune.com/business/chi-0610220146oct22,0,7471971.story?coll=chi-business-hed

[chicubs111]

chicago has to get agressive now with this huge merger and start trying to get oversees exchanges and maybe one day will have a shot at the NYSE

[Taft]

Any commentary by our inhouse panel of experts on this article below? Just curious--what are the chances that the Merc's stocks will take a bit of a tumble, and how likely would it be that this merger would be called off if that were to take place? I ask this because wouldn't CBOT's investers see the long-term growth potential of a combined CME-CBOT entity as more important than immediate stock value? Again, pardon my rather amateur (if even that) knowledge of this topic:


That is an odd article given a lot of the other coverage on the matter. Sure, Merc's share could tumble between now and then, but this is a risk for most mergers. I haven't seen any evidence that Merc is in for a slide. On the contrary, since they have gone public their growth has been steady and positive. This news would only seem to cement that trend, given the expected outcome.

Here's the economist's take. As usual, they do a great job of laying the whole situation out, focusing on how this deal would effect the CME's ability to compete against other exchanges not fear mongering about derivatives and other what if's.

Taft





Chicago bulls

Oct 19th 2006
From The Economist print edition
A merger to create the world's biggest exchange puts the wind up its rivals

MORE than two decades ago Terry Duffy and Charles Carey both got their start in life trading hog futures in the chaotic open-outcry pits of Chicago, places dominated by burly men with loud voices and sharp elbows. On October 17th the two chairmen did the trade of their lives: they shook hands on an $8 billion deal in which the Chicago Mercantile Exchange (CME) would buy the Chicago Board of Trade (CBOT). They aim to create the world's biggest financial marketplace, allowing investors to buy and sell financial futures in everything from interest rates to government bonds, stock indices, currencies, gold and, yes, pork bellies. With one smart move, the Chicago boys have sent waves around the world.

Far from being a simple cross-town deal, the merger plan unites two world leaders in the exchange-trading of derivatives, a fast-growing form of finance. Together they trade more than 9m contracts a day worth a notional $4.2 trillion. Should the deal win shareholder and regulatory approval, the market value of the combined entity, now about $25 billion, would surpass that of the New York Stock Exchange (NYSE), or Eurex, a German-Swiss derivatives giant. More importantly, it will put pressure on rivals such as the NYSE to pull off their own transatlantic merger plans. And it ups the ante for any exchange trying to seize a strong role in derivatives.

The competition has good reason to envy Chicago. Its exchanges are joining forces at a time when others trying to consolidate—particularly in Europe—have tripped over shareholders, regulators and each other. Yet the urge to merge is compelling. Clients, such as hedge funds, have the technology to trade across different sorts of assets in increasingly complex strategies. Now they want exchanges to offer a place to do this with as little cost and as much liquidity as possible.

Steve Rodosky, an asset manager at PIMCO, a Californian firm that manages $700 billion, says the CME Group, as the merged entity will be called, should make it easier and cheaper to trade bundles of futures, such as treasury and eurodollar futures, that are now split between the exchanges. The CME and CBOT project at least $125m in cost savings from the merger, hinting that some of this could go into price cuts. But these are far from assured. After Eurex announced a plan to challenge the CBOT's monopoly in American treasury futures in 2003, the Chicago exchange cut its fees only until the Europeans had been defeated. It has since raised them twice.

With this in mind, and an eye on the regulators who will be fathoming the antitrust considerations, some brokers are arguing that a reduction in the number of exchanges in America will push up fees. “My initial reaction is 'show me the benefits,'” says Gary DeWaal of Fimat, a global brokerage firm. He notes that futures exchanges do not have to pool the clearing of their trades, as stock exchanges do, which gives them added control. Such practices could face scrutiny from the Commodity Futures Trading Commission and the Department of Justice, which will both review the deal.

Rival exchanges are already accusing Chicago of a protectionist motive. “This looks like a plan to shut other people out,” says a spokesman for Euronext, a pan-European exchange operator, which hopes to sell more derivatives products in America through its LIFFE exchange if its tentative merger with the NYSE goes ahead. For Deutsche Börse, parent of Eurex, news of the merger must be even more depressing. Eurex will lose its world leadership in derivatives. That is likely to make the Germans more persistent in their push to create a pan-European exchange. But Euronext has repeatedly rebuffed them and the Germans earlier dropped a bid for the London Stock Exchange—which, with no derivatives business of its own, must also be worried.

Messrs Duffy and Carey next may well steal a march into territory outside America and Europe. At a conference in Brazil this week, the head of the Milan bourse announced a co-operation agreement with the Brazilian and Mexican exchanges and Euronext moved closer to Taiwan. All will have been jolted by the news from Chicago. None will be able to ignore it.

[Taft]

From the trib today. Hopefully this story will shed some light on how the Merc is regarded in the industry.

Taft


Chicago Merc profit rises 34% on higher fee revenue

By Annie Pinkert
Bloomberg News
Published October 24, 2006, 11:03 AM CDT

The Chicago Mercantile Exchange, the biggest U.S. futures market, said third-quarter profit increased 34 percent, boosted by higher transaction fees and electronic trading revenue.

Net income climbed a more than forecast $103.8 million, or $2.95 a share, from $77.5 million, or $2.22, a year earlier, the Merc said in a statement today. Average per-contract payments rebounded from the lowest on record in the second quarter.

The exchange, which agreed last week to purchase the rival Chicago Board of Trade for about $8 billion, said average daily volume rose 28 percent to 5.4 million contracts during the quarter. Electronic trading increased to 71 percent of total volume, with options trading rising 39 percent, as investors sought ways to reduce the cost of buying and selling.

``The Merc is viewed as the 800-pound gorilla of the exchange world and this shows they will keep going,'' said Bruce Weber, a professor at the London Business School, who follows exchanges. ``If you are pleasing your shareholders, as these numbers show, you get approval for expansion plans.''

A futures contract is an agreement to buy or sell a specific amount of a commodity or security at a specific price and time.

Revenue rose 22 percent to $274.7 million from $225.7 million. Profit was expected to rise to $2.87 a share, according to the average estimate of 14 analysts surveyed by Thomson Financial.

Shares of Chicago Mercantile Exchange Holdings Inc., the Merc's parent company, climbed $13.07, or 2.7 percent, to $503.25 yesterday in New York Stock Exchange composite trading. They've risen 37 percent this year.

Average rates per contract was about 64 cents, an increase from about 63 cents in the second quarter. It was about 66 cents in the third-quarter of 2005.

The rate per contract had been declining because of an increase in trading of interest-rate options, for which the exchange charges some of its lowest fees, and increased trading by members, who pay lower rates than non-members.

``CME reported a strong quarter, with in-line expenses and better-than-expected RPC,'' Christopher Allen, an analyst at Bank of America Securities, who has a neutral rating on the stock, said in a note to investors. ``The core business appears to be in pretty good shape as the company looks to complete the BOT acquisition.''

The Merc's purchase of the Board of Trade will create the largest exchange for futures contracts on stocks, bonds, currencies and commodities. The takeover will end more than a century of competition between the exchanges, which started out trading commodities and pioneered financial futures in the 1970s.

Markets worldwide have announced about $25 billion of transactions this year as trading becomes increasingly electronic and investors seek to reduce the cost of buying and selling.

Both exchanges were members-owned institutions until the Merc reorganized and sold shares in 2002. Board of Trade members converted to a for-profit company and sold stock for the first time last year.

The Board of Trade started in 1848 trading grain contracts while the Merc was founded as the Chicago Butter and Egg Board in 1898. The Merc introduced the trading of financial futures in 1972, with currency contracts, and the Board of Trade followed with the first interest-rate futures in 1975 and Treasury-bond futures two years later.

The Merc's Eurodollar futures contracts, or contracts to buy a U.S. or foreign security denominated in U.S. dollars and deposited in European banks, have been the most actively traded contracts, by volume, of all exchanges this year, with 244.6 million contracts traded this year through June, according to FuturesIndustry, an industry Web site.

Along with Eurodollar contracts, the Merc also lists futures on foreign exchange, weather, housing, hogs, cheese and the Standard & Poor's 500 stock index. The Board of Trade has contracts on soybean, wheat, ethanol, gold, and the Dow Jones Industrial Average stock index along with Treasury futures, it's most popular contract.

Global trading in futures and options contracts on lending rates, currencies and stock indexes increased 13 percent in the second quarter to $484 trillion from a year earlier, the Basel, Switzerland-based Bank for International Settlements said earlier this month in its quarterly review.

--With reporting by Nandini Sukumar in London and Courtney Dentch in New York.

[chi-townJay]

looks like chicago is gonna be the finacial capital of the US pretty soon.....http://video.google.com/videoplay?docid=3077121389222489525

[Neuman]

"The city has some "wonderful, smaller" mutual fund firms, including Harris Associates and Ariel Capital Management, Phillips said, "but none of them have the scope of Kemper and Stein Roe.""

Becky Yerak seems to over look Nuveen Investments, which manages over $160 billion in assets out of its office at 333 W Wacker....

[Chi_Coruscant]

http://www.chicagobusiness.com/cgi-bin/news.pl?id=22971

Buy Nymex? Tough decision for Merc
By Ann Saphir
Nov. 22, 2006

(Crain’s) — Just as the Chicago Mercantile Exchange prepares to swallow up the Chicago Board of Trade, another tempting acquisition target has popped up.
New York Mercantile Exchange Chief Executive James Newsome says he’s open to merger overtures from anyone, including the Chicago Merc. A merger with the New York bourse would fill in some gaps in the Merc’s lineup of futures contracts by adding contracts tied to energy and metals. But Nymex shares soared after its recent initial public offering, making it a pricey takeover target, with a market capitalization of about $11 billion.

At first blush, the Chicago Merc executives appear to face a choice between adding another deal to the $8-billion CBOT takeover, or allowing a rival to snatch up Nymex. However, waiting it out may be a viable option. A contract under which the Merc provides electronic trading services to Nymex could serve as a deterrent to a takeover by another exchange.

Under the 10-year contract, any futures exchange with its own electronic trading system that merges with or is acquired by the Nymex must list its own products on the CME’s Globex system within two years of the merger. Even if the deal isn’t structured as a merger, the acquiring exchange would still have to honor the current contract, meaning it couldn’t get the cost savings of adding Nymex electronic trading to its own.

Neither the Nymex nor CME can break the contract for five years, at which point Nymex may pay an undisclosed fee to get out. CME and Nymex spokeswomen declined to comment on the contract.

Meanwhile, some analysts say a combination of the CME and Nymex makes sense.

“CME would love to get its hands on Nymex’s oil business,” said Patrick O’Shaughnessy, an analyst at Morningstar Inc. in Chicago.

The CME, whose main business is in futures tied to U.S. interest rates, began providing electronic trading services for Nymex after marketshare gains by all-electronic Intercontinental Exchange Inc. threatened the franchise of Nymex’s Manhattan floor traders.

Buying and selling of Nymex’s electronic energy contracts on the CME’s Globex system has since risen to about 400,000 contracts a day. At that pace, the CME stands to make $35 million to $50 million a year from the agreement, making Nymex the CME’s second-biggest customer. On Tuesday the CME announced it would handle electronically traded Nymex metals contracts as well.

“Nymex will continue to look into all options and do what’s best for their shareholders,” spokeswoman Anu Ahluwalia said.

For the CME, the risks of acquiring the Nymex may in the near term outweigh the gains.

“The Nymex could be a great target for somebody: They have defensible marketshare, they generate plenty of income and many exchanges want to have energy products to trade,” said Jim Ginsburg, a CME shareholder and founding partner of investment fund Vernon & Park Partners. “It's just that at some point you have to make a rational purchase, and at these valuations it’s very hard to call a purchase of Nymex rational.”

[the urban politician]

http://www.chicagobusiness.com/cgi-bin/news.pl?id=23182
Dec. 13, 2006

'Very good progress' on CME-CBOT deal
(Reuters) — Work is well under way on the proposed merger of the two largest U.S. futures exchanges and the deal is still expected to close in the middle of 2007, the Chicago Mercantile Exchange said on Wednesday.

Craig Donohue, CME's chief executive, said at a Goldman Sachs conference that "very good progress" had been made on the deal, announced in October, to absorb CBOT Holdings Inc., parent of the Chicago Board of Trade.

In materials prepared for the conference, the CME said 15 work streams are under way related to the merger, as well as a management-level transition planning team.

The proposed deal must still win the blessing of the U.S. Justice Department and be approved by CME and CBOT shareholders and Board of Trade members. Those shareholder votes are anticipated in the first quarter.

Donohue said the CME was preparing to respond "as quickly as we can" to the Justice Department's second review phase of the deal. That DOJ request for information was announced by CME on Dec. 1.

CME shares closed at $531.92, down 1.82%, or $9.84, on the New York Stock Exchange on Wednesday. CBOT closed down 1.84%, or $2.94, at $157.26 per share.