CME/CBOT merger goes through

After victory was declared by the Chicago Mercantile Exchange (CME) on the bidding war for the Chicago Board of Trade (CBOT) in the late afternoon of July 9, the skies opened up and it poured rain in Chicago. No doubt, Ceres, the goddess of grain whose statue adorns the top of the CBOT building, was blessing the venture by feeding the Midwestern crops; or more likely, was clearing the air for a new Chicago exchange, one that will become the largest futures exchange in the world, and join two age-old foes into one trading conglomerate. (See “CBOT hits CME bid,” below).

“It’s a great day for Chicago,” CBOT Chairman Charlie Carey noted, ebullient that his board’s recommendation of taking the CME offer was followed by the CBOT rank and file. It had been up in the air even as late as the Friday before the vote, when the CME upped its bid another 7% to wrangle in one of the largest shareholders, Caledonia Investments of Australia, which basically swung the vote. When the Intercontinental Exchange (ICE), which fought a good fight, came back that day stating it was holding its bid, the hat had been thrown in the ring. For the most part, the CME leaders slept well on the weekend, knowing like any good Chicago politician, that the election was sealed.

Once the CME and CBOT joined their clearing a few years ago, this was a natural next step. And if it hadn’t been for the upstart ICE, this deal would have been signed sooner. However, as ICE Chairman Jeff Sprecher noted in a letter to CBOT members after the vote that ICE actually performed an important function by putting in a competing bid...the CBOT shareholders got $3 billion more they would have if competition hadn’t come into play. Any CBOT trader worth his salt should thank Sprecher, as well as the larger shareholders who saw the CBOT worth, and fought for it, ultimately getting a higher price. The exercise right issue with the Chicago Board Options Exchange still exists, but Chicago exchanges have to fight over something. This will be the next hurdle, and really pertains to only roughly 1,330 yellow badge members.

Plenty will need to be done to make these two behemoths one, starting with moving the CME floor products to the CBOT, moving the CBOT electronic trading to Globex and, yes, determining what will happen with the CBOT gold contract. These of course are details, especially because the heavy lifting, clearing, already is done. For now, it’s champagne, confetti and keeping the share price high.

Ironically, during this happy day for Chicago, ICE was fighting Congress as well as the New York Mercantile Exchange (Nymex) over its involvement with the failure of Amaranth, the hedge fund that lost $6 billion in two weeks last year. Currently, Congress is responding to findings that the failure of the fund cost millions for individuals in higher natural gas prices. It’s not that ICE did anything illicit or offer anything other than legitimate over-the-counter natural gas contracts, which the Amaranth traders used when they hit limits at Nymex, and were told to wind down their position. For Sprecher, who is the consummate businessman, this couldn’t have been a good day. The talk is that if ICE’s bid failed, it would be the catch in another exchange’s net: the New York Stock Exchange/Euronext being the most oft mentioned potential suitor.

That is another story. For now traders in Chicago can sleep well with the extra millions in their pockets, while knowing soon they will walk into the historic CBOT building, which soon also will house eurodollars, equity indexes and livestock. Yet one thing Sprecher said during a meeting with CBOT members before the vote still resonates: “Anybody who changes the name of the Chicago Board of Trade is a nut.” He’s right, of course.

About the Author

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors.