From the April 01, 2011 issue of Futures Magazine • Subscribe!

Merger mania and the clearing bonanza: Trader's view of the world

Click here for the 2011 Traders' View of the World chart.

Football is a simple game," said English soccer great Gary Lineker in 1990 after a gut-wrenching World Cup semi-final loss to Germany. "Twenty-two men chase a ball for 90 minutes, and at the end, the Germans win."

You can’t help but wonder if executives at the former London International Financial Futures Exchange (Liffe) aren’t thinking something similar as the Germans look to be wrapping up a deal that folds the remnants of Liffe (now known as NYSE.Liffe) into Deutsche Börse as part of the deal everyone’s talking about: namely the German exchange’s proposed takeover of NYSE.Euronext. The takeover would unite two futures exchanges that have been chasing, dodging and battling each other for nearly two decades. The derivatives behemoth would control roughly 93% of Europe’s futures business, putting it on a par with Chicago-based CME Group, which controls 98% of U.S. futures trading.

Calling it a German takeover is, to be fair, something of a misnomer — for Deutsche Börse hasn’t been majority-owned by Germans for nearly a decade. Still, the rivalry between Deutsche Börse’s derivatives subsidiary, Eurex, and Liffe is a storied one. The "Battle of the Bund," for example, was a seminal moment in the triumph of electronic trading. That’s when Eurex’s predecessor, the Deutsche Terminbörse (DTB), wrestled liquidity in the benchmark German interest rate contract, the Bund, away from Liffe in 1997. At the time, DTB was the upstart electronic exchange, and Liffe was the established open-outcry exchange. Andreas Preuss was DTB’s head of business development in those days, and now he runs Eurex. He’s also slated to run derivatives trading for the new entity.

The DTB’s taking of the Bund still represents the only time in history that one exchange managed to wrestle an existing liquidity pool away from a rival — a fact that won’t be lost on regulators as they mull the proposed mega-merger and look for ways to let it happen while making sure it doesn’t run amok.

The announcement (more accurately, the leak — for exchange bosses were forced to make an announcement after word of the pending deal got out) comes amid a flurry of other cross-border deals that include the London Stock Exchange’s (LSE) offer to buy Canada’s TMX Group, Bats Europe’s acquisition of Chi-X Europe, the Singapore Exchange’s (SGX) attempted takeover of the Australian Stock Exchange (ASX) and Wiener Börse’s (Vienna Stock exchange) move to further expand its network of Eastern European exchanges.

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