Futures exchanges joined
The next step in the rapid consolidation of financial exchanges happened this week with the announced acquisition of the Chicago Board of Trade by the Chicago Mercantile Exchange. The joined companies will be the world's largest financial exchange, one even larger than the New York Stock Exchange. The combined exchanges handle over $4 trillion daily in sales. The deal is worth $8 billion.
It will be the biggest financial exchange deal ever. The two Chicago exchanges have as their main specialty the sale of derivatives, which are essentially contracts based on future prices in stocks, bonds, and currencies, as well as in commodity futures. These include agricultural futures, a way for investors (including farmers) to spread out risk on future crops and livestock prices. The futures market has outstripped the two exchanges' older business of selling actual commodities like pork bellies and soybeans.
Futures are used especially by hedge funds and pension funds. And the move away from the colorful scene of brokers on a crowded pit floor to a digital system, has made more transactions possible at a lower cost.
The trend to world-wide 24-hour digital changes is rocking the financial industry. According to a story in the Wall Street Journal ("Chicago Merc to Buy Board of Trade", 10/16/06):
The Chicago deal illustrates the increasingly rapid pace at which financial exchanges world-wide are consolidating to lift profits by cutting costs. Exchanges have morphed from member-owned clubs into profit-hungry publicly traded companies. This gives them an incentive to make acquisitions and also a currency, their stock, with which to do so.
Other deals in the works are the NYSE's ongoing struggle to acquire Paris-based Euronext, which has developed into a fight with Deutsche Boerse. NASDAQ and the London Exchange are in serious talks, and the Borsa Italia wants to make a deal with Deutsche Boerse. New York-based Nybot and Atlanta-based ICE are merging as well. National exchanges are combining as well, including those of several Scandinavian exchanges with Swedish-based OMEX.
As excahnges get bigger and more international, they get harder to regulate and they consolidate pricing power versus brokers, who once ran such exchanges In fact, institutional buyers are already bypassing brokers to trade digitaally on their own. The Merc/Board fo Trade merger will only accelerate that trend.
