In December the New York Board of Trade (Nybot) membership overwhelmingly voted to be acquired by the IntercontinentalExchange (ICE). Ironically, Nybot is one of the last U.S. exchanges to shun electronic trading. Correction: it is the last. Even the grain exchanges have gone electronic. Thus, the last exchange floor standing being acquired by a purely electronic exchange pretty much illustrates where the world is headed. While in New York, I got some insights from several people on this acquisition, many who view it as a positive, especially for the products such as the Dollar Index, which will be at a huge advantage trading electronically, and to the softs products, which will find new liquidity as an expanding trading world seeks access to these commodities. ICE may have bought in for the clearinghouse, but it got a bevy of contracts that could be a boon to its product list.
This doesn’t mean the acquisition is without its controversies. There are plenty of those, but this is the exchange world, and without being too cynical, those rubs typically come with the territory. See “Trendlines,” (link below).
The ICE acquisition comes on the heels of the Chicago Mercantile Exchange (CME) announcing its purchase of the Chicago Board of Trade (CBOT), to be completed by mid 2007, if it is. “If” only because of the dissension heard during the Futures Industry Association Expo in Chicago in late November. Although both the CME and CBOT folks clearly are on board with this merger, the amount of sniping elsewhere surprised even me.
And why wouldn’t it be good? I asked. “Antitrust issues,” was a typical response I got. One fellow spouted about some trade that was broken by the CME years ago, using that as an “ah ha” moment of an early example of non-competitive behavior. I wasn’t convinced, even with the call from the U.S. Department of Justice for some more information from the exchanges.
The anti-competitive aspect seemed to fuel many of the arguments. One person stated that if the CME and CBOT got together, the barrier to entry would be so much greater that no new exchanges could flourish. Where would new products be launched? he asked. I noted that new products are being launched everyday (see “New products for a new world,” link below). And then of course, there’s ICE, which seems to have done well for itself. Yes, it’s backed by banks, but that is no guarantee for success.
Then there were the brokers, who fall into the category: be careful what you wish for. Since forever, brokers have complained about the expensive redundancies of doing business on the CME and CBOT. Finally, three years ago the CBOT brought its clearing to the CME clearing house. But now that’s a problem, as the clearinghouse is run by the exchange, not the “members.” No doubt, I was told, fees will escalate; the cost of data will go up, which has already happened, and not only in Chicago; and doing business will be more expensive. Well, perhaps, but it wouldn’t be the first time.
I admit many of these comments were from exchange personnel, attorneys and brokers. What do traders think? Frankly, they just want to trade, and the most efficient way to do it at the lowest price works for them. I realize greater minds will parse this issue, but it seems to me merged exchanges will utilize economies of scale to accomplish savings. Further, in an industry that thrives on innovation, fueling the antitrust fires is, well, anti-competitive. I say let it ride and let the markets decide.