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Chicago juggernaut? Shareholders approve Merc-CBOT merger
by Christopher Clukey

Two Chicago exchanges have joined to give new meaning to the phrase, “the city of big shoulders.”

On July 10, shareholders approved the purchase of the Chicago Board of Trade by its former rival, the Chicago Mercantile Exchange, with The Merc paying $11.9 billion. This ended a four month bidding war between the Merc and IntercontinentalExchange (ICE). An Atlanta-based energy futures market, ICE had most recently offered $11.7 billion. The new company, to be known as the CME Group, will be headquartered at the Board of Trade and is being called a “juggernaut” by industry observers.

As the Associated Press observed, CME Group will be “the world's largest one-stop futures and options market for everything from interest rates to pork bellies, and make it the world's No. 1 exchange of any kind by market value, outpacing Deutsche Borse and NYSE Euronext.”
Merc Executive Chairman, Terry Duffy, called it a “groundbreaking merger.”

“The combination of CME and CBOT creates a strong international company better positioned to compete with growing global exchanges and the over-the-counter market. The combined company will transform the global derivatives industry and create efficiencies for customers and members while delivering significant benefits to our shareholders,” Duffy said. News releases by the two firms and statements to the press by their management have repeatedly described the new company as a global competitor, leading analysts to predict that the company will take steps to become even larger and more diverse.

The CME Group will be the world's largest one-stop futures and options market for everything from interest rates to pork bellies, and make it the world's No. 1 exchange of any kind by market value, outpacing Deutsche Borse and NYSE Euronext.

The Merc is the world’s largest futures market by volume and the CBOT is the third largest. CM Group is expected to acquire other exchanges, especially those which have strong energy futures portfolios or trade in stocks. Both of these are currently lacking at The Merc and CBOT. Analysts suggest that buying a large European exchange (such as the London Stock Exchange) would plug these gaps and make CM Group a truly global company. Closer to home is the New York Mercantile Exchange; a merger would make sense because the The Merc already offers electronic trading of the New York exchange’s products. Such mergers would follow a general consolidation trend in the exchange industry that has seen ICE buying the New York Board of Trade and the NYSE buying the Euronext stock exchange. If CME Group buys a stock exchange it would be the first such purchase by futures exchange.

"The trend of the industry is you have to get bigger or get out," CBOT trader Harlan Krumpfes, told the Associated Press. Krumpfes has traded at the CBOT since 1975 and backed the merger. Bernard Dan, CBOT president and CEO, said “Starting on Day One, our combined company will be ready to compete in the global environment well-armed for growth and innovation.”

Due to the long planning period for the merger (since October 2006) integration is expectedly to be very smooth. "Our integration teams have been working diligently to prepare for the combination of our two companies, and I'm confident that we will be able to hit the ground running once we close the transaction," said Craig Donohue, CME Chief Executive Officer.

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