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The papers in Chicago today had a story about letters exchanged between top
leaders of the CBOT and the CBOE and the possible merging of the two
exchanges. The letters were leaked to the press, by some accounts to
sabotage the idea.
The potential merger makes a lot of sense in a couple different ways. First
off, there is a common heritage and a crossover in membership. The members
of the CBOT launched the CBOE and still retain trading privileges to trade on
the floor of the CBOE. In fact, I believe about 700 of the CBOT members are
currently electing to trade on the CBOE floor. The volatility of the stock
market, and its derivatives, has boosted the lease prices of the CBOT seats.
Some traders estimate a monthly CBOT seat would lease for $5000 or less,
rather than the about $10,000 per month they are currently leasing for.
It is clearly in the best interests of both exchanges and the members to work
together. If the CBOT were to forge ahead with its planned demutualization
and for-profit status, they may forfeit the trading rights its members enjoy
on the CBOE. Also, time-consuming lawsuits would delay implementation of the
demutualization. Clearly, the CBOE and the CBOT must come together quickly
so the CBOT can meet the competitive challenges in front of it from
for-profit exchanges, foreign competition, ECNs, new domestic exchanges and
electronic trading in general.
There has been some speculation that once the Chicago exchanges go for-profit
that there would be listing of other exchanges contracts. I fully expect
this and other extensions of the exchanges product lines that would fit in
with the technology investments they will make.
Thus, it makes sense to make friends and alliances now before the cutthroat
competition overcomes the industry. The CBOT has long used the strength of
its clearing enterprise as a selling point. However, the Chicago Board of
Trade Clearing Corp. is an independent organization and in a for-profit
environment, its interests may not mirror those of the CBOT. Thus a merger
or acquisition of the CBOE become that much more important for the CBOT. The
CBOT has already seen the CBOTCC think and act independently in the
discussions with EUREX.
I think the CBOT/CBOE combination makes a lot of sense and would offer the
industry a much stronger player to meet the competitive demands of the
marketplace. It also would be a strategic combination that would make the
authorization and launching of single stock futures contracts that much more
likely to succeed. But that is a subject for another day.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
Disclosure: John J. Lothian is the President of the Electronic Trading
Division of The Price Futures Group, Inc. an Introducing Broker.
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