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NYSE sale has CME on hot seat

The S   P 500 trading pit is fury activity right close market Chicago Board Trade October 25 2011.

The S & P 500 trading pit is a fury of activity right at the close of the market at the Chicago Board of Trade on October 25, 2011. | Al Podgorski~Chicago Sun-Times

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Updated: January 22, 2013 10:08AM



CME Group, the nation’s largest futures exchange operator based in Chicago, will have to up its game, possibly making a blockbuster acquisition of the Nasdaq stock market, now that it has a new competitor — the IntercontinentalExchange, experts and media reports say.

CME Group is the holding company of the Chicago Mercantile Exchange and the Chicago Board of Trade.

That’s not a unanimous opinion, however, as other experts say CME Group won’t even feel the impact of ICE’s announcement Thursday that it will buy the venerable 220-year-old New York Stock Exchange and its owner, NYSE Euronext, in an $8.2 billion deal. A CME spokesman said the company had no comment.

The Atlanta-based ICE, considered by many a 12-year-old upstart known for its electronic trading platform and dealing in investing contracts known as futures, has quickly gobbled up a wide array of exchanges. Indeed, ICE is no stranger to CME Group, since ICE tried unsuccessfully to prevent the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange five years ago.

The most dire warning about CME Group’s ability to compete against the newly emboldened ICE came from Barron’s magazine columnist Steve Sears, who wrote that the deal poses a “great threat” to CME.

Crain’s New York Business reporter Aaron Elstein speculated that CME Group might be interested in acquiring the Nasdaq to counter the increased competition.

Analysts were less concerned about CME Group’s resiliency, even though CME has been battered for more than a year by leadership tumult, low-volume trading and the MF Global scandal, among other issues.

“ICE is operating from a position of strength, and this deal (buying the New York Stock Exchange) will make (ICE) even more competitive and rachet up the competition in the derivatives business,” said Morningstar analyst Gaston Ceron.

“Is it going to sink the CME? No,” Ceron said. “But it’s never good to see one of your big competitors get better.”

The New York Stock Exchange takeover will give ICE, which already has built a global commodities business, a strategic boost in the derivatives market.

The key part of the commodities strategy is ICE’s takeover of Liffe, Europe’s second-largest derivatives market. Liffe is considered the “crown jewel” of NYSE Euronext partly because it is a futures exchange, analysts say. Futures have more pricing power than do stocks because futures contracts must be bought and sold in the same place, while stocks can be bought and sold on any exchange.

Other analysts think CME Group won’t be affected at all.

Rich Repetto, a principal at Chicago-based broker-dealer and investment banking firm Sandler O’Neill, said Thursday, “It’s just a change in ownership of a [CME Group] competitor.

Craig Pirrong, a professor of finance at the University of Houston, said Liffe tried several years ago to compete with CME Group “and got its head handed back to it.”

“It is very difficult for any new entrant to compete with an entity [such as CME Group] that has large liquidity,” Pirrong said. “This doesn’t change the competitive landscape that much.”

The takeover of the New York Stock Exchange by itself is a signature moment, analysts said, showing how the NYSE’s clout has dwindled amid technological and regulatory changes. Indeed, the $8 billion sale is $3 billion less than the NYSE would have fetched in a proposed takeover just last year.

Contributing: AP



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