TOPS
MERGER MANIA
Insiders have been talking about the likelihood of mergers and acquisitions in the exchange space since the industry moved towards a for-profit model. After months and even years of speculation and rumors, 2006 saw some deals struck.
NEW YORK STOCK EXCHANGE/EURONEXT
It’s looking like the U.S.-based stock exchange and the European derivatives exchange have broken through the barriers to create the first trans-Atlantic exchange.
CME/CBOT
Most surprising may have been the fact that the two Chicago exchanges were able to keep the deal under wraps until the announcement. Perhaps it was the smoke screen that the CME was talking with Deutsche Borse and the Chicago Board of Trade (CBOT) was talking with the London Stock Exchange.
ICE/NYBOT
Although it’s the smallest, this may be the most intriguing combination as the New York Board of Trade (Nybot) and Nymex, the IntercontinentalExchange’s (ICE) chief rival, are located in the same building, share a trading floor and had been expected by many to eventually merge.
With the ICE taking a significant chunk of market share from Nymex’s benchmark WTI crude oil contract, and the CBOT taking an even larger chunk of the Comex division’s gold contract, Nymex didn’t figure to be a top. But they solved their electronic platform issue by outsourcing to the CME’s Globex and executed one of the most successful IPOs of the year.
PUMP UP THE VOLUME
Futures and options exchanges recorded record volume once again in 2006, with total U.S. futures and options volume up more than 30% over 2005.
Opinions are split on whether the performance of the stock market in the second half of 2006 means that happy times are here again or if we are seeing a repeat of the irrational exuberance of the late 1990s. Some analysts point out that the Dow has climbed a wall of worry to get to its current state and cite disturbing similarities to periods just prior to market crashes. Others are simply bullish, however, those are the ones that remained bullish through the correction on 2000.
BOTTOMS
The much talked about housing bubble didn’t exactly blow up in 2006, but for the first time in several years housing values declined and inventories rose significantly. Those scoffing at the idea of a housing bubble are now stating that the downturn will end. Stay tuned.
ENERGY HEDGE FUNDS
Sources close to Mother Rock LP, the energy-based hedge fund run by former Nymex President J. Robert (Bo) Collins blamed unprecedented volatility in natural gas spreads for the huge drawdowns that led Mother Rock to wind down the fund in August. Perhaps hedge fund Amaranth Advisors and its star trader, Brian Hunter, should have learned a lesson, instead they apparently continued holding long winter/short summer natural gas spreads and may even have taken over some of Mother Rock’s positions. The result was the largest reported hedge fund loss ever: more than $6 billion.
The 1970s margarine ad had the catch phrase, “It’s not nice to fool mother nature.” In the ad, Mother Nature would let loose with a clap of thunder and huge lightening bolt at the offending party; the point being: don’t mess with the all-powerful. That may be analogous to what happened to wheat locals this past September. Roll after roll, wheat locals had been making money fading the huge positions benchmarked to the Goldman Sachs Commodity Index (GSCI). They put on bear spreads ahead of the roll and took profits as funds benchmarked to GSCI rolled long positions pushing the spread to full carry. In September a record bull market, and perhaps an unseen all-powerful hand, reversed the normal roll effect. Estimates of losses by locals bear spreading wheat ranged from $40 million to $100 million.
OUTRAGE OF THE YEAR — REFCO FX CUSTOMERS LEFT HOLDING THE BAG
In February, retail forex customers of the bankrupt Refco FX appeared to be on track to receive the money in their accounts, which had been frozen since October 2005, when Foreign Capital Markets LLC placed the high bid, $110 million for Refco FX and its assets, which included 17,000 retail accounts and Refco’s 35% stake in FXCM. The proposal stipulated that all of Refco’s retail FX account holders would be made whole. The Refco creditors committee, consisting of secured creditors, rejected the bid. FXCM would later improve their offer but that was rejected as well. Refco’s creditors committee stated in court documents that Refco would be better served if the operation was wound down. As the Refco bankruptcy dragged out through 2006, eventually all assets were sold off and the retail account holders received a small fraction of their own money held in non-regulated Refco FX accounts. One thing is for sure, Refco FX customers were not better served by the process.
Admarine Olivares, a 12-year student from Maria Theresa Mirabal Middle School in New York, made a 10.3% return on U.S. stocks in a competition sponsored by financial data firm ADVFN. Olivares was one of 31 students at two schools who participated in the competition. Each student was given $2,000 to invest in five stocks. Olivares’ returns outpaced the S&P 500 during the competition by more than 300%, according to ADVFN.
Hedgestock, a two-day networking event and music festival for hedge fund professionals was held in Hertfordshire, England in June. The event, loosely modeled after Woodstock, featured legendary rock band The Who and raised money for the Teenage Cancer Trust. Hedgestock certainly provided a unique networking venue and gave headline writers and punsters a field day.
BUT CAN A COMPUTER DELIVER A RIGHT CROSS?
The New York Post reported that NYSE broker Stephan Mara, son of the late owner of New York Giants Wellington Mara, tackled and choked fellow broker and Philadelphia Eagle fan Bob Tomasulo. The incident occurred the week after the Eagles defeated the Giants 36-22. No report on whether there was a “round two” after the Eagles defeated the Giants on a last second field goal in the playoffs.
THE BUTLER DID IT
The SEC in September charged Graham Lefford, house manager for the South Hampton, New York residence of Robert Sillerman, a media and entertainment investor, with unlawful insider trading. In the summer of 2004, the SEC says Sillerman was in the process of acquiring Sports Entertainment Enterprises (SPEA), a dormant shell company, to use as a vehicle to acquire the commercial rights and likeness of Elvis Presley. Lefford found out about the acquisition from documents he faxed for Sillerman and used that information to purchase 5,000 shares of SPEA stock at 12¢. The stock shot up more than 9,000% after Sillerman announced the purchase of SPEA and its acquisition of the Presley rights.
Sienna Wildwood, founder of car broker Green Means Go, which specializes in finding cars that run on biodiesel fuel, created a calendar featuring 12 women involved in biofuel production.
The ISE and CBOE took their prospective causes to the people in the form of campaign buttons at the Futures Industry Association’s annual expo in Chicago last fall. ISE had already won a court battle allowing the free listing of option on exchange-traded funds, now its legal team is going after CBOE’s benchmark S&P 500 and Dow Jones index options hoping the courts will allow multiple listings. CBOE thinks the ISE should get its own benchmarks.
Mr. Jignesh Shah, managing director of the Financial Technologies Group and CEO of Multi Commodity Exchange (MCX) of India, was honored with the US-India Business Leadership Award presented in November by New York Senator and legendary cattle trader Hillary Clinton. MCX has emerged as the second largest Natural Gas Exchange after Nymex. MCX launched its natural gas futures for trading on July 10, 2006 and within two months of its launch, volume surpassed 5 million contracts.
LIE DOWN WITH DOGS…
The Washington Post reported that Jeffrey Skilling’s defense team was left on the hook for $25 million in legal fees for his defense. The Los Angeles-based law firm of O’Melveny & Myers LLP reportedly collected $40 million, but that apparently didn’t cover all of its cost, which included a former SEC accountant who spent
954 hours on the case at $600 per hour as an expert witness; a University of Chicago law professor who was paid $1,000 per hour as an expert witness but did not testify; and lead attorney Daniel Petrocelli, who generously discounted his normal rate of $850 to $800 Per hour. How many middle- and lower-income Californians, who saw their gas bills double, triple and in some cases quadruple and endured rolling blackouts in 2000 and 2001, not to mention the thousands of Enron shareholders, paid for this defense?
On May 25 after the 56-day trial, Skilling was convicted on 19 of 28 accounts, including securities fraud, making false statements to auditors, conspiracy and insider trading. On Oct. 23 he was sentenced to 24 years and four months in Federal prison for his 19 convictions. Accused fellow fraudster Kenneth Lay was convicted on 10 counts of securities fraud on May 25. Lay passed away from a reported heart attack on July 5, months before his sentencing. The judge in the case later vacated Lay’s conviction.
Information Management Network awarded its most innovative index derivative product award to the CBOE’s volatility index (VIX) options at the Super Bowl of Indexing Conference this December. It was the third consecutive year that a CBOE product was awarded. CBOE had won in previous years for its S&P 500 BuyWrite index and VIX futures.
Computerworld named the CME as one of the best workplaces for IT professionals in its annual ranking. CME was the only financial exchange honored.
Milton Friedman is considered the foremost advocate of free market economics but he also can be credited with adding legitimacy to the revolutionary concept of financial futures.
CME Chairman Emeritus Leo Melamed often jokes about the lack of acceptance of financial futures in the early days. He points out how the financial and political heavy weights of the day on Wall Street and in Washington would often dismiss his ideas as coming from crazy pork belly traders from Chicago. There no doubt was a lot of pessimism towards his ideas from the arrogant powers of the day, but when Milton Friedman put his seal of approval on these proposals they gained an air of legitimacy that could not be denied.
Chris McMahon and Steve Zwick contributed to this article.
