Chicago exchanges urged to join forces

Chicago exchanges urged to join forces
By Doug Cameron in Chicago, John Authers in New York and Jeremy,Grant in Washington
Copyright The Financial Times Limited 2006
Published: October 20 2006 03:00 | Last updated: October 20 2006 03:00


Chicago's futures exchanges should pursue a deal with the city's main options house to prevent a rival such as the NYSE Group accelerating the expansion of its US derivatives business, local brokers said yesterday.

The planned takeover by the Chicago Mercantile Ex-change of the Chicago Board of Trade has sparked intensifying debate in the trading community on the next steps in industry consolidation following a year of unprecedented deal-making.

Market participants insist that no deal involving the Chicago Board Options Exchange is imminent and movement was months away as the city's two futures groups pursue their planned $8bn combination, while the NYSE continues its pursuit of Euronext, the pan-European equities and derivatives exchange, with which it has agreed a deal.

However, the future of the CBOE, which is in the process of demutualising, has become a key discussion point following this week's announcement. Some brokers are urging it to mend its relations with the options exchange across the street amid a long-running dispute over members' interests.

"If they are able to put the CBOE into this thing, then you have a real powerhouse all located within 50 feet of each other," said Les Rosenthal, managing member at Rosenthal & Collins, a Chicago futures brokerage. "I think it's only logical, because if they don't, someone like the NYSE will look at them."

John Thain, the NYSE's chief executive, has a close working relationship with CBOE executives, and has admired the Chicago group's creation of a hybrid floor and electronic tradingsystem, now adopted bythe revitalised New York exchange.

However, Mr Thain already has a small options business through the NYSE Group's Pacific Exchange. He has made it clear that his priority is to expand into futures, which could bedone through Euronext.Liffe, because the business offers higher margins than options products. With fewer alternative entry points into the futures business following the Chicago agreement, closing the Euronext deal arguably now becomes an even higher priority.

Analysts suggested that only a collapse of the Euronext deal would trigger interest in the CBOE or the New York-based International Securities Exchange, which spars for market leadership with its Chicago rival in the US options business.

Despite well-publicised political opposition in France, the NYSE has so far won a series of regulatory clearances, and its share price has gained 46 per cent over the past four months as sentiment gathers strength that it will be able to complete the transaction.

Felix Rohatyn, senior adviser at Lehman Brothers and former US ambassador to France, who has been informally consulted by people on both sides of the bid, told the Financial Times: "It will ultimately come down to what the shareholders want, but it is important to get some sort of political understanding on what is involved."

However, he said the financial sector involved fewer political sensitivities than, for instance, agriculture or pharmaceuticals. "Agriculture is the third rail [in France], the stock exchange is not."

He added that Europe needed to look across the Atlantic and the Pacific "to where the big pools of capital are - the NYSE gives a window on the Far East nobody else can give them".

The CBOE made it clear this week that it will pursue its planned demutualisation after converting at the start of the year from a member-owned organisation, though the plan - which could lead to an initial public offering - has been delayed by a dispute with the CBOT.

The board of trade launched a legal action against the options exchange in July following the breakdown of talks aimed at resolving the status of CBOT member rights to trade at the CBOE and receive stock and dividends in the event of a change of control. The CBOT said this week that the planned CME deal did not change its position, while the CBOE also reiterated its stance.

The two futures exchanges have expressed interest into expanding into options because of the sector's rapid growth, boosted in part by the product innovation by the CBOE and its highly-regarded management team. The CBOE also holds valuable licences for some equity index products. However, CME executives said any move into other asset classes such as options would not take place until it has completed its planned combination with the CBOT in 2008.

Additional reporting by Thorold Barker in New York