Merger mania could transform derivatives exchanges
By Melissa Goldfine
BOCA RATON, Fla., March 19 (Reuters) - Only the fittest derivatives exchanges around the world will survive an expected onslaught of mergers and consolidations that likely will transform the industry in the next several years, insiders told Reuters at a major industry conference recently.
Merger mania already has hit in Europe, where some futures and options markets have wed one another while others have teamed up with securities markets to create one-stop shopping for investors.
The goal is to funnel cost savings from streamlined operations to customers, who are expected to flock to whichever exchange offers the best value.
Derivatives trading continues to grow as big investors look for ways to minimize risk in their investment strategies. Futures and options, highly-leveraged contracts to buy or sell financial instruments, are often used as hedging instruments.
``In the United States, there will be one or two surviving futures exchanges within the next decade,'' Vincent Viola, chairman of the New York Mercantile Exchange, said in an interview on the sidelines of the annual Futures Industry Association conference. ``(Consolidation) is the most efficient outcome. Why duplicate ... services that have to be performed by each exchange?''
Chicago Mercantile Exchange Inc., the world's No. 2 futures exchange, and the New York Mercantile Exchange Inc. said last month that they would offer their derivatives products on the same electronic trading system. The announcement sparked speculation that the NYMEX and CME could eventually merge.
``Clearly, there is a very real interest between the Chicago Mercantile Exchange and the New York Mercantile Exchange exploring areas for a strategic alliance,'' Viola said.
CONSOLIDATION IN EUROPE
In Europe, one of the most successful alliances so far has been the joining of Deutsche Boerse with the Swiss Stock Exchange in 1998 to form all-electronic derivatives exchange Eurex, a powerhouse that wrested away from the London International Financial Futures and Options Exchange (LIFFE) its flagship Bund futures contract. Eurex has surged to the top spot among the world's futures exchanges in terms of volume.
Last year, pan-European giant Euronext , which already had combined exchanges in Paris, Brussels, Amsterdam and Lisbon, bought LIFFE. The massive union offers access to an international mix of stocks and derivatives on one platform.
Separately, Web-based Intercontinental Exchange (ICE) took over London's International Petroleum Exchange in 2001. Earlier this year, ICE and NYMEX considered an alliance, but talks have since broken off.
Although exchanges in Asia have not yet jumped on the consolidation bandwagon, they will eventually join forces with other exchanges, said Thomas Kloet, chief executive officer of the Singapore Exchange , which became a publicly listed company in November 2000 and offers both securities and derivatives. That exchange's initial publc stock offering (IPO) brought a huge influx of capital, which Kloet is eager to invest in an acquisition.
``Those of us who have done an IPO have cash,'' Kloet told Reuters. ``I've got 800 million (Singapore dollars, or about US$440 million) in tangible assets and my shareholders want me to put that ... to use.''
Industry insiders at the FIA meeting said that although some derivatives exchanges will be gobbled by others, upstarts are constantly cropping up to pose challenges to existing marketplaces. One example cited repeatedly was that of the electronic International Securities Exchange, which began trading options in 2000 and leaped to the No. 3 spot among options exchanges the following year.
``I don't think that the notion of one or a small group of exchanges ... is one that's viable,'' said James Davison, president of Cargill Investor Services. ``You continue to see development of new markets.''
MEMBER-OWNED STATUS A HURDLE
For some exchanges, one hurdle to consolidation is their status as member-owned organizations. Members at U.S. exchanges who make their living from the open-outcry trading pits are often concerned about protecting those pits from encroachment by cheaper, faster electronic trade. Members also are more apt to cling to the tradition of pit trade than to focus on implementing change to boost the exchanges' bottom line, industry sources said.
In the United States, both the CME and NYMEX have demutualized, transforming themselves into for-profit corporations from member-owned institutions. Both exchanges also have reorganized into holding company structures, paving the way for possible initial public offerings of their shares.
But the Singapore Exchange's Kloet said completing the demutualization process is not enough. Exchanges need to have IPOs and bring in investors outside the narrow circle of members -- investors who are likely to force exchanges to increase profits and shake up the way they have done business in the past.
The world's No. 3 futures exchange, the Chicago Board of Trade, is in the process of reorganizing into a for-profit company. The CBOT awaits the green light on its proposal from U.S. regulators, after which members will vote on the plan.
CBOT Chairman Nickolas Neubauer said he expects futures exchanges to increase instances of cooperation, but a full-blown merger could be difficult.
Recently, the CBOT, CME and Chicago Board Options Exchange overcame historic rivalries to form OneChicago LLC, an electronic trading platform for single-stock futures that will launch after regulators iron out the rules for trading the once-banned products in the United States. OneChicago will go head-to-head with Nasdaq Liffe Markets LLC, another joint venture also set up for trading single-stock futures.
While many industry insiders said that the mergers already seen in Europe have been inevitable, they do not believe such consolidation is imminent in the United States. Just getting to the point where an exchange is able to launch an IPO is a long process, and no U.S. exchange has become publicly listed yet.
``The ability of exchanges to do other things, either expanding their business scope or merging with other exchanges, becomes a lot simpler if they are public,'' said William Brodsky, chairman and CEO of the CBOE. ``We're talking about something that wouldn't occur for years....It takes time.'' |
