From the December 01, 2006 issue of Futures Magazine • Subscribe!

Boy are times a-changin'

The announcement of the proposed merger between the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) was one of the best kept secrets in the industry. I learned while eating breakfast the day it was announced. Since then I’ve asked members and industry folks when they first heard about it, and similar stories unfold. One person told me that she suspected the day before that something was afoot at the CME because she heard via the grapevine that the place was crazed.

It’s one of those things that goes under the “thought it would happen sooner” column. When the CBOT moved its clearing operations over to the CME in2003, that was when we believed a merger would happen if it did. But it never came, and with all the speculation on a merger of the Euronext.Liffe-New York Stock Exchange or even the CME buying the New York Mercantile Exchange (Nymex), thoughts of the CBOT and CME joining forces seemed to fade. But common sense prevailed, as well as a perfect storm of events: both exchanges going for profit, competition from afar, the friendship between CME Chairman Terry Duffy and CBOT Chairman Charlie Carey, and, hell, even the fact the CME’s lease was coming up for renewal. But it definitely was done with the stealth of a special ops team, and certainly caught the industry by and large by surprise.

The next question is how Nymex will fit into the game plan. Earlier this year the CME moved Nymex’s electronic contracts back to its Globex platform. We are told a representative from the CME was with Nymex during the announcement to calm any fears that the energy exchange might have felt, after all, it might feel a bit threatened: first it’s the Intercontinental Exchange offering to buy the New York Board of Trade, which shares the Nymex floor, and then its the CME merger with the CBOT, which trades a successful electronic gold futures contract, a direct competitor to Nymex’s floor-traded gold contract on its Comex division. But what would happen if Nymex decides to join the party? One hell of a big U.S. exchange, and perhaps a Justice Department visit to boot.

But for now, at least with the two Chicago exchanges, this move shows an industry in flux, willing to change old ways and move toward a business, not membership, side of the ledger. The warm and cozy days of exchange membership are drawing to an end, and consolidation and mergers, also a fact in the brokerage community, are settling in on the exchange level. In our “Top 50 Brokers” story (page 62), we get reaction from the brokerage community to the exchange announcement and how this merger will change the their business and their customers’ trading ability.

Futures trading hasn’t been a backwater business for some time. Today, millions of contracts are traded daily all over the world and global communications and electronic trading make it possible to trade 24 hours a day, seven days a week. The amount of money pouring through the business is mind boggling, and has grown dramatically. Case in point: “A billion here, a billion there...” by Managing Editor Daniel P. Collins (page 58), discusses the fall out of Amaranth Advisors, the hedge fund that lost roughly $6 billion dollars in a little more than a week’s time. Although this sent much consternation through regulators, the truth is it was a small event to the financial system. Contrast that to Long-Term Capital Management, which lost $4.6 billion over a four-month period in 1998 and kept Alan Greenspan awake at night. Oh, how the world is a-changin’.

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