It's the platform, stupid
EXCHANGES | Electronic systems key in deal, veteran trader says
June 21, 2007
BY DAVID ROEDER droeder@suntimes.com
Commodities trader Richard Dennis -- famous in the Chicago markets for gaining, losing and gaining again multimillions of dollars -- has a little free advice for Chicago Board of Trade shareholders considering two takeover bids for the exchange.
Look to the quality of the bidders' electronic trading systems, he said Wednesday. Dennis said that alone makes the offer from the Chicago Mercantile Exchange clearly better than a financially richer proposal from IntercontinentalExchange Inc.
It's the traders waving and shouting orders who usually come to mind when we think of the futures exchanges. But it's the electronic trading - now about 75 percent of the business at both the Merc and the CBOT - and the computer systems that are key to the takeover proposals CBOT members are considering.
(AP file)
"When it comes to the reliability of trading platforms, the Merc is a nine, the Board of Trade is a six and ICE is a one," Dennis told the Sun-Times. He said that of all the trading glitches he encounters, "80 percent of them are due to ICE and the rest equally to the Board of Trade and the Merc."
Whoever buys the Board of Trade would take over its computerized trading system. The relative merits of the Merc's computer network, called Globex, and ICE have become a hot topic with traders in advance of a July 9 shareholder vote on a CBOT-Merc union.
ICE is an all-electronic exchange that handles a fraction of the Merc's daily volume, but has become a prime trading venue for the volatile energy markets. Some Board of Trade shareholders have voiced doubts that ICE could handle the volume from their exchange.
Others, in opposing the Merc proposal as endorsed by CBOT management, argue the technological risk is small and price alone should decide the buyout.
On dollars, ICE has the decided advantage. Terms of its proposal value the CBOT at $224.50 a share, or $11.86 billion, while the Merc is offering $190.37 a share, or $10.06 billion, plus a one-time dividend of $9.14 a share, worth an extra $485 million.
Dennis, who said he owns no stake in any exchange, said CBOT shareholders would be wrong to vote down the Merc offer to try to "squeeze another 4 percent or so out of the deal."
Lost in the debate over the offers is the risk built into the stock price of each exchange, Dennis said, because the shares have appreciated rapidly on huge growth in trading volume and merger mania.
"I suspect a lot of the Board of Trade shareholders who complain about the Merc offer aren't into electronic trading very heavily," Dennis said.
Futures exchanges report glitches in electronic trading to their federal overseer, the Commodity Futures Trading Commission. A spokesman for that agency said it keeps no statistics on system reliability.
Both the Merc and ICE insist their systems operate 99.99 percent of the time without trouble.
Some traders, however, have said they have been vexed by problems with ICE. A delay in trading executions of mere milliseconds can be huge to active traders.
Dennis said ICE's system "tends to crash" during fast markets and has delayed reactions during slow markets. "The Merc system is more mature and consistent," he said.
ICE spokeswoman Kelly Loeffler said the system was down only six minutes in 2006.
Cult-like figure calls this year 'not so good'
Richard Dennis made hundreds of millions of dollars in the markets during both the 1980s and 1990s, but in each case closed up shop after substantial losses in customer accounts. He's been back in recent years, trading for his own account and a couple of business partners, and mostly from his home.
Now 58, he remains a cult-like figure among traders who revere him as a pioneer for his mathematical approach of futures trading that's supposed to strip out emotion and hunches. He admits that his reclusive nature adds to his legend.
Asked if he would sit for a Sun-Times photo, Dennis replied, "People won't think of me as Greta Garbo if I do."
Dennis in 2000 liquidated a trading fund that once drew $350 million. He's staged a quiet comeback in commodities, saying that last year was the best he's ever had by a whisker.
And this year? "Not so good."
David Roeder |
