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Chicago exchanges unite

Diantha Parker Oct 17, 2006

KAI RYSSDAL: I don’t want to get all technical on you here. But there was another line item people were looking at today. Industrial output. Basically, how much factories are being used. It’s one of those key measures of a slowing economy the Fed looks at. Off an unexpectedly large six-tenths percent last month.

The city of big shoulders sounds like an appropriate place for two of the country’s financial giants to join forces. The Chicago Mercantile Exchange agreed to buy the Chicago Board of Trade today for about $8 billion. That means the Merc is now the world’s biggest exchange for futures contracts on stocks, bonds, currencies and commodities. It’s also put an end to years of speculation and competition. More from Diantha Parker in Chicago.

DIANTHA PARKER: The Board of Trade started in 1848 trading grain contracts, while the Merc was founded as the Chicago Butter and Egg Board in 1898.

As times changed, so did the exchanges. While both introduced the trading of financial futures in the 197Os, the Merc has been the more aggressive innovator. Current CEO Craig Donohue:

CRAIG DONOHUE: We’re the first exchange to de-mutualize, the first to become a publicly traded company, the first to really embrace and succeed with electronic trading in the way that we have done it, and this is the first major U.S. merger of main financial markets.

There are analogies to this resulting behemoth elsewhere in the business world. Randy Frederick is director of derivatives at Charles Schwab.

RANDY FREDERICK: Perhaps Microsoft’s not the greatest comparison but people when they think of who is the king in terms of the software business, Microsoft’s the name that typically comes to the top of the list. If you were saying who’s the king on futures, this would be it.

The merger will help the Chicago exchanges compete with others around the world, in response to pressure for lower trading costs.

Thomas Lys is professor of accounting at the Kellogg School of Management at Northwestern. He says the two Chicago entities are not so much competitors as complementary rivals.

LYS: I would probably stress the idea that this may actually be good for customers —i.e., the people who trade.

The deal won’t be finally approved until next year.

In Chicago, I’m Diantha Parker for Marketplace.

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