Chicago Merc Buys CBOT

If one wants to trade stocks in the US, New York is the place to be. For futures contracts, though, Chicago is not the “Second City” so much as the 800-pound gorilla. With the Chicago Mercantile Exchange buying the Chicago Board of Trade for $8 billion, the gorilla just put on a little weight. The only question is whether this Microsoft-style hold on futures is a good thing for investors and speculators.

Absent concerns about competitive fairness, the merger makes incredible sense for both sides. There is very little overlap in the contracts traded. The CME does cattle, milk, forex, and interest rate futures. The CBOT handles soybeans, gold and 30-year bonds. One-stop shopping makes an exchange more valuable as a marketplace. Costs could drop by $125 million before taxes with the combination.

However, it is the competitive issues that may raise the biggest problems. They are, without a doubt, the biggest and richest such exchanges in the US. The New York Mercantile Exchange, which specializes in petroleum, has ties to the CME’s Globex trading system. The New York Board of Trade, home of the FCOJ contract (frozen concentrated orange juice), isn’t anywhere near as big. To carry the computer analogy to a rather inaccurate conclusion, there’s CBOT-CME as Microsoft, NYMEX as Apple, and NYBOT as Linux.

That said, there are competing exchanges outside the US, and given instant communications and time zone differences, the new exchange will not have a virtual monopoly. Competition in trading has been global for quite some time, and a single dominant exchange in a single nation is not as big a deal as it might otherwise have been.

The pre-supposition here is the continued liberalizing of such trading. If an order can be filled in Chicago, Amsterdam or Singapore with equivalent ease at an equivalent price, this works out for everyone. Should barriers go up, thus reducing access to other markets, the merger may merit review.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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