Sometimes the best catch is the girl next door. As the world’s big stock markets fight for cross-border unions, Chicago’s derivatives exchanges have done the obvious cross-town deal. The Chicago Mercantile Exchange will buy the Chicago Board of Trade, to create the most liquid futures market and the biggest exchange by market capitalisation.
Despite intense historical rivalry, the two exchanges were always going to kiss and make up one day. Putting the two together should be relatively straightforward. They are in the same city and will have more compatible cultures than, say, a transatlantic combination. They already share clearing services. And the deal creates powerful positions in futures products across the yield curve in US treasuries, in currencies and agricultural commodities.
Cost savings of $125m are not huge – partly because clearing is already shared – but roughly cover the modest premium being paid to CBOT. They partly reflect the benefit of switching to a single trading platform. Meanwhile, the exchange will have the firepower to defend its strong market positions and expand into new products and geographies.
The deal does, however, raise two big issues. First is the anti-trust risk. While the two exchanges have powerful positions, their products do not overlap. And they can argue they face competition from over-the-counter trading. Still, their sheer scale could give them serious market power and regulators should take a close look.
The other big issue is the second round effect of the deal. Derivatives remain the fastest-growing and most profitable area for exchanges. This deal ups the stakes for rivals and leaves few big targets out there. The New York Stock Exchange will fight harder than ever for control of Euronext – with its strong London futures platform – given the powerful wind now blowing from Chicago.