Chicago Economic & Finance News

[the urban politician]

Just in from the Financial Times:

Concern is growing that the DOJ may act to impede this merger. I'd post a clip of the article but the Financial Times website is having some sort of technical problems right now.

[Eventually...Chicago]

^^^ i read that article too.

I wonder how the political element of this merger is going to play out. Illinois has a couple of pretty powerful politicians right now (Durbin, Emmanuel, and what's that guy's name, oh yea, Obama) I know the DOJ wants to uphold the law as much as they can, but the also want to keep their jobs. I'll be interested in watching how this unfolds.

I don't know very much about the particulars of financial markets but if a combined Nymex & CME only makes it the 3rd largest exchange in the world, i say go for it. Why shouldn't the US have the biggest?

[ChitownVillian]

Originally Posted by Eventually...Chicago

^^^ i read that article too.

I wonder how the political element of this merger is going to play out. Illinois has a couple of pretty powerful politicians right now (Durbin, Emmanuel, and what's that guy's name, oh yea, Obama) I know the DOJ wants to uphold the law as much as they can, but the also want to keep their jobs. I'll be interested in watching how this unfolds.

I don't know very much about the particulars of financial markets but if a combined Nymex & CME only makes it the 3rd largest exchange in the world, i say go for it. Why shouldn't the US have the biggest?

^^Because it aint in New York?Would be my guess.

[the urban politician]

I think by making this a New York vs. Chicago thing you guys are WAY oversimplifying things.

Lets not remember that some of the investors in this Four Seasons upstart are Citadel and other Chicago trading entities. Plus, Nymex is obviously interested in merging with the CME, thus losing their independence.

The truth is, CME has had a falling out with many of its biggest customers, including its own neighbors.

[the urban politician]

Originally Posted by the urban politician

Just in from the Financial Times:

Concern is growing that the DOJ may act to impede this merger. I'd post a clip of the article but the Financial Times website is having some sort of technical problems right now.

Here it is:

Concern intensifies over Nymex hurdle
By Hal Weitzman in Chicago

Published: February 26 2008 02:00 | Last updated: February 26 2008 02:00

Concerns are intensifying that the CME group's proposed purchase of Nymex will face serious difficulties securing regulatory approval because relations with the US Department of Justice have deteriorated in recent weeks.

Today sees the end of a 30-day exclusive negotiating period between the two exchange groups, with the CME considering raising its offer to seal a deal and prevent a rival bid.

However, the deal may face a serious hurdle in Washington.
Financial Times

[VivaLFuego]

Washington is in the pockets of the banks and Wall St, most of whom oppose the merger, so it will be an uphill battle. It's not a city-vs.-city thing, but rather a conflict of differenent financial sector cultures in Chi and NYC.

[the urban politician]

An interesting and more thorough look at this whole antitrust issue and the exchanges in question:

Washington probes concerns over Chicago’s power
Melanie Wold

21 Feb 2008
Exchanges’ control over clearing is under fire

Bulge-bracket banks worried about the increasing power of exchanges may have prompted a strong letter from the US Department of Justice to the Treasury Department. Investment banks have always been worried about the increasing power of exchanges.

The Department of Justice warned in the letter this month that futures exchanges’ control over clearing has made it difficult for other entities to compete in the financial futures markets.

The Department of Justice said exchanges that control clearing did not allow futures contracts to be fungible, or traded through other exchanges in the way that equities could be. If multiple exchanges could simultaneously attract liquidity in the same or similar futures contract, this would facilitate “sustained head-to-head competition”.
Financial News Online

[Nowhereman1280]

^^^ I will be so pissed if the DOJ blocks this merger. Its completely because the banks own the DOJ and are desperately trying to block the expansion of the most rapidly growing financial sector lest it take away some of their power. We need this merger to go through now, while the banks are still reeling from their mortgage mistakes and the credit crunch, while they are still weak, so that the CME will be as powerful, if not more powerful then them by the time the economy is back on their feet.

Really I don't see this as a monopoly forming so much as a challenge to the old way of doing things. Instead of having finance dominated by the old school bankers, we will hopefully develop a duality of power between futures exchanges and hedge funds and the Old banks, forcing both sides to compete for our $ and make cooperative decisions instead of acting on their own.

[the urban politician]

^ But the issue of monopoly is a real one, and the DOJ's job is to screen for that.

Investment banks may have power, but there are a lot of them, and they compete with eachother. Same with traders, hedge funds, etc.

I'm playing a bit of devil's advocate here, admittedly, but how many entities are really capable of competing with CME at this point?

[Eventually...Chicago]

What i was saying earlier though is that the DOJ, being part of the executive branch, could have a new boss who is from chicago. One thing i do know about government employees is that they like to keep their jobs, I don't think blocking a merger for the boss's city would play very well. Also, several of the DOJ's positions would have to be reconfirmed by the senate once a new president gets elected. The senate, of course, is Mr. Durbin's territory. I'm just thinking that no matter how powerful wall street thinks it is, hometown pride would win out.

[the urban politician]

The DoJ letter might just be the wake-up call US futures exchanges need. O’Dowd said: “Although futures exchanges outwardly discuss and exhibit fees they argue that execution to settlement is transparent. This is not necessarily so.”

Neither CME nor Nymex separates clearing fees from transaction fees in their financial statements, but clearing is obviously a substantial part of their business, said O’Dowd: “Therein lies the problem.”

^ From the article I just posted above, I thought I'd extract this interesting little excerpt.

I have long conceded that I am far from being an expert of financial matters, but I sure am learning a lot. What we are seeing here is a hint at how difficult these decisions DOJ makes are. They really are treading a thin line--by ensuring competition while being careful not to damage a successful business model.

This dilemma is hinted at above. By spinning off CME's clearing division, the DOJ must fully be aware how detrimental a blow it would deal to the exchange. And, as Mr. O'Dowd said above, "Therein lies the problem."

One must wonder if there is some middle ground, or compromise, that allows some fungability while still giving CME some control over its clearing. I couldn't fathom what that could be, but I wonder if it's being discussed.

Any financial experts out there?

[killaviews]

As the CME always points out, its about global competition, not US competition (and certainly not a Chicago/NY thing). Using Thomas Friedman analogy of a world becoming flatter, the finance industry is flattening much faster than any other industry. The banks are thinking in the short-term. When the CME loses it clearing, and can no longer compete with say Deutsche Borse - America loses. (But by then all the American banks may be controlled by Middle Eastern countries and China).

I hope the banks get there exchange up and running, there is nothing wrong with that, but will they be hypocrites and own their clearing operations, too? Probably.

[the urban politician]

CME keeps banks in its sights
By Hal Weitzman in Chicago

Published: February 27 2008 02:00 | Last updated: February 27 2008 02:00

CME Group, the world's largest futures exchange, yesterday stepped up its war of words with investment banks, blaming them for creating the conditions that allowed the US subprime crisis to develop.

Terry Duffy, CME chairman, told a gathering in Chicago of the Futures Industry Association - which represents large brokers - that banks' reluctance to clear over-the-counter contracts at established exchanges had led to multi-billion dollar writedowns on Wall Street.

His comments come as international regulators are pressuring the financial industry to introduce a clearer system for settling contracts in the credit derivatives market.
Financial Times

[the urban politician]

It seems like the prospects of this venture itself is argument against a CME monopoly:

Goldman Sachs is close to investing in futures exchange

The Wall Street Journal
04 Mar 2008
Goldman Sachs is likely to invest in an upstart futures exchange that aims to compete against CME Group, people familiar with the matter say.

The new exchange, which hasn't yet chosen a name or a chief executive, attracted investments late last year from a dozen Wall Street and trading firms, including JP Morgan Chase, Deutsche Bank and Citadel Investment Group.

Electronic bond trading company eSpeed is handling the technology for the exchange, which hopes to launch later this year.
Financial News Online

[the urban politician]

Little fear of antitrust fight over CME/NYMEX
Tue Mar 4, 2008 6:44am
WASHINGTON (Reuters) - CME Group Inc's (CME.N: Quote, Profile, Research) proposed acquisition of NYMEX Holdings Inc (NMX.N: Quote, Profile, Research) is unlikely to spark antitrust concern because the Justice Department approved a similar CME deal just last year, according to antitrust and exchange experts.

Big banks -- which view CME, which runs the world's largest derivatives exchange, as a competitor to their over-the-counter derivatives businesses -- could oppose the multibillion merger but are unlikely to prevail, the experts said.
Reuters

[the urban politician]

New complication for CME’s Nymex bid
By Ann Saphir March 07, 2008
(Crain’s) — In a move that could impact CME Group Inc.’s bid to buy the New York Mercantile Exchange, Nymex members have set the stage for a dispute over the value of their franchise, demanding a special meeting with management in a letter mailed Thursday.
Crains

[Marcu]

Originally Posted by Nowhereman1280

^^^ I will be so pissed if the DOJ blocks this merger. Its completely because the banks own the DOJ and are desperately trying to block the expansion of the most rapidly growing financial sector lest it take away some of their power. We need this merger to go through now, while the banks are still reeling from their mortgage mistakes and the credit crunch, while they are still weak, so that the CME will be as powerful, if not more powerful then them by the time the economy is back on their feet.

Really I don't see this as a monopoly forming so much as a challenge to the old way of doing things. Instead of having finance dominated by the old school bankers, we will hopefully develop a duality of power between futures exchanges and hedge funds and the Old banks, forcing both sides to compete for our $ and make cooperative decisions instead of acting on their own.

Do you have any evidence to suggest that the banks "own" the DOJ? Or any background on how the futures industry operates to know whether the merger will create monopoly power? Or awareness of the fact that evidence of actual monopolization is not required to block a merger? Or the fact that the FTC has just as much if not more say in merger decisions as the DOJ?

[the urban politician]

Banks-led futures exchange to be called ELX
Tue Mar 11, 2008 8:07pm EDT

NEW YORK, March 11 (Reuters) - A new low-cost futures exchange being launched by a dozen banks and trading firms to rival CME Group's (CME.N: Quote, Profile, Research) Chicago Mercantile Exchange, will be named ELX Electronic Liquidity Exchange, the group said on Tuesday.

The exchange, which had been operating under the working name "Four Seasons" since it was first announced in December, said it will provide a low-cost alternative to CME Group, which dominates trading in U.S. financial derivatives.
Reuters


The next 2 articles sort of go together:

The CME Group Stays Aggressive
posted by Diane Eastabrook, Chicago Bureau Chief at 6:20 PM on 03/10/08
Chicago is the birthplace of futures trading. It all started 160 years ago at the Chicago Board of Trade. The merger last year of the Chicago Mercantile Exchange and the Chicago Board of Trade created the CME Group, now the world's largest futures exchange.

CME Group Chairman Terry Duffy traded live hogs for a decade-and-a-half before being tapped to head up the Merc six years ago, and CME Group last year. So, he knows a thing or two about life in the trading pits or, more appropriately now, life on the trading screen. While the CME saw its trading volume rise nearly 27% last year, Duffy knows his exchange can't rest on its laurels.
PBS


Terrence Duffy of the CME Group Shares His Strategy For Staying Ahead in the Futures Industry
Monday, March 10, 2008
SUSIE GHARIB: Stock market volatility, a credit crunch and global demand for commodities are sparking explosive growth in the futures industry. Global trading volume increased nearly 30 percent last year and is on track to exceed that number this year. At the top of the industry is Chicago's CME Group, headed by Terry Duffy. Recently Diane Eastabrook sat down with the exchange chairman, who talked about the importance of staying on top of this highly competitive industry.

DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the roller coaster world of futures trading, the CME Group keeps racing to higher summits. Last year's merger between the Chicago Mercantile Exchange and the Chicago Board of Trade created the world's largest futures exchange. In a few weeks, all open out cry trading at the Chicago mercantile exchange will move to new pits now being built at the Chicago Board of Trade. But as CME Group Chairman Terry Duffy prepares for his cross-town move, he talks about the CME's need to get even bigger.

TERRENCE DUFFY, CHAIRMAN, CME GROUP: It's not a question of bigger is better. The question is the efficiency to the marketplace and the way to achieve the efficiencies is through the saving of consolidation and passing those savings to your clients. We're not just competing with exchanges here in the United States. We're competing with exchanges throughout the world. We're competing with the over-the-counter markets. And we've got to become efficient and the way to create those efficiencies partially is through consolidation.
PBS

[Nowhereman1280]

Originally Posted by Marcu

Do you have any evidence to suggest that the banks "own" the DOJ? Or any background on how the futures industry operates to know whether the merger will create monopoly power? Or awareness of the fact that evidence of actual monopolization is not required to block a merger? Or the fact that the FTC has just as much if not more say in merger decisions as the DOJ?

... I'm an Economics and Finance double major who has read the Wall Street Journal since I was in 8th grade, I would say I know a little bit about these things. Apparently CME group thinks I might know a little about the futures and derivatives market seeing as how they just invited me to interview with them for a summer internship earlier this week...

First of all, the major banks are probably the most powerful lobbyists in Washington, the have an ass ton of money and the Federal Reserve, the government's mean's of fucking with (up) the economy, is completely dependent on the banks as a distribution system for its policies. I don't see how you could even start to argue that the DOJ isn't going to put uneven weight on the opinions of the banks and investment banks.

Second, I have read extensively about the futures industry and happen to know several traders who work at the CME. There is no way in hell that NYMEX and CME will create a monopoly, which is economically defined as ~80% of the market. It may be near that of the US futures market, but unfortunately for those who think it will be a monopoly, the futures market is global, where the CME will have nowhere near monopoly power.

What does the fact that the FTC has just as much influence over mergers as the DOJ have anything to do with my rant about the DOJ in response to an article about the DOJ. If I am talking about the DOJ's possible intervention, why would I go on some random ass tangent about the FTC when I am talking about the DOJ?

[cbotnyse]

I can tell you as a delegate member of the CBOT that traders are worried about monopoly powers because we are the ones who get bent over with higher trading fees.