Equity index provider arbitrage

October 10, 2011 01:52 PM

When CME Group first announced that it would take a majority stake in Dow Jones Indexes a year ago my first thought was to ask if there would be any antitrust issues as CME Group has exclusive licenses with Standard & poor’s (a competitor to Dow Jones Indexes) to list futures products on its S&P 500 index as well as others. Neither Dow Jones Indexes nor CME Group seemed to worry it was an issue at the time. 

Recently there has been numerous media reports regarding a potential tie-up between CME’s Dow Jones index business and Standard & Poor’s. To date there has been nothing official but what initially caught my eye was a Reuters' story that attributed a sharp drop in Chicago Board Options Exchange (CBOE) stock to the potential merger. CBOE has exclusive licenses to list equity options products with both Dow Jones and S&P. In fact, CME and CBOE have sparred in court in the past over the nature of their separate licenses with S&P. The idea put forward in the story was that CBOE’s exclusive license agreements with the two companies could be threatened if there were some type of agreement.

Since, CBOE leadership has said that a Dow/S&P tie-up would not be a threat because they have agreements going out to 2018.

What I don’t understand is that in none of the speculation regarding the whole matter has the idea of the Department of Justice coming in to look over such a merger between CME’s index business and McGraw Hill’s S&P index business to see if it were kosher. The whole premise behind the Reuters story appears to be prima facie evidence that such a deal would raise antitrust concerns.

The regulatory regime in the equity options world puts a premium on multiple listings and CBOE has had to fight in court to maintain their ability to list certain indexes exclusively. If the two best known index providers merge, the grip of these exclusive licenses would tighten further.

When Russell Indexes chose to enter into an exclusive license with the Intercontinental Exchange (ICE) to offer futures on it popular Russell 2000 index back when the two exchanges were battling over the Chicago Board of Trade, CME turned to S&P to license its similar 400 and 600 indexes as a proxy for the small- and mid-cap space. A merger of two of three major index providers would seem to further limit that type of competitive response.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.