Issue #52

Last Update June 22, 2007

Finance FIA '07 by David Katz March 20, 2007  The Futures Industry Association held its 2007 conference in Boca Raton this month, and was host to an industry bombshell. The Intercontinental Exchange, which has just completed its absorption of the New York Board of Trade, announced an unsolicited bid for the Chicago Board of Trade, throwing a monkey wrench into CBOT's acquisition by the Chicago Mercantile Exchange. The ICE offer, financially attractive and cleverly structured to overcome some of the difficulties inherent in the CME's bid, was the major topic of conversation during the four day conference. 

The ICE bid involves swapping 1.42 shares of ICE for each CBOT share. CBOT stockholders will retain 51.5% ownership of the merged entity. In comparison, the CME bid offers .3006 CME shares for each CBOT share, and gives CME 69% of the ownership of the merged entity. In addition, the Department of Justice has expressed antitrust concern with the CME/CBOT merger. Leaving two competing Chicago exchanges, as the ICE offer does, may not present the same anticompetitive risk. Also, the CME/CBOT merger involves the potential loss of CBOE (Chicago Board Options Exchange) trading rights, which the ICE/CBOT merger would preserve. 

The CME/CBOT merger is scheduled to be voted on by shareholders of both organizations on April 4. It remains to be seen whether this vote will take place as scheduled and whether CBOT management can put aside its Chicago-centric bias and seriously consider the ICE bid. 

Two keynote speakers at the conference drew member crowds. Fareed Zakaria, Editor of Newsweek International and host of Foreign Exchange with Fareed Zakaria on PBS, spoke on the United States and the international situation.  

The second keynote speaker, Alan Greenspan was honored by CFO Magazine as an American Hero. Rather than making a speech, Mr. Greenspan answered questions from the audience for over an hour. While candid with his answers to most questions concerning the economy and the financial markets, Mr. Greenspan, cognizant of his ability to affect market prices with his statements, refused to answer any questions that could be predictive of prices or interest rates. His view on the increasing competition to New York and Chicago markets by foreign exchanges, especially in London, is that the American markets are not at risk. They will continue to grow, though they will not be able to maintain their extraordinarily high market share. Other countries have merely adopted the successful US model. Mr. Greenspan also predicted that trading will never become entirely electronic; humans like to deal with each other, and face to face trading remains attractive. He also took a reasonably sanguine view of current housing market problems, calling it a price problem, not a lending problem. 

Other trends discussed at the conference included the continuing growth of electronic trading, the increasing trend to market amalgamation and internationalization, and the growth of credit derivatives.  Algorithmic trading (immediate electronic trading using sophisticated computer models) has also been increasing, placing intense speed and data demands on the electronic exchanges, to the point where latency (the time required for the electronic signal to get from the exchange to the trading computer) has become a significant factor. The electronic exchanges have been attempting to shorten the latency time by providing co-location facilities to algorithmic traders; that is, they are hosting the trading computers on their own premises to decrease the distance the data has to travel. 

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