Chicago merger creates super-market

Chicago's two commodities exchanges are to merge in a US$25 billion ($37.7 billion) deal that will create the world's biggest market for derivatives.

The new super-exchange will trade contracts worth more than US$4 trillion every day.

In the most dramatic example of the consolidation sweeping the world's exchanges, the Chicago Mercantile Exchange is paying US$8 billion for its smaller cross-town sibling, the Chicago Board of Trade.

The pair pioneered financial futures trading in the 1970s, and the explosion in such trading in the past decade - particularly because of the rise of hedge funds - has turned them into international powerhouses.

The merger brings together the CME's expertise in interest rate, equity and foreign exchange derivatives and the CBOT's strength in interest rate futures and commodities.

"This is a landmark agreement for our companies, our industry and the city of Chicago," said CBOT chairman Charlie Carey, who will become vice-chairman of the combined group.

"As a single entity, we will be the world's premier financial marketplace in terms of product breadth, global reach and market capitalisation and ensure that Chicago remains the centre for risk management worldwide."

Both exchanges still operate open trading floors, which will be combined on the CBOT premises.

The CBOT's electronic trading will be switched to the CME's highly successful Globex trading platform.

CME chief executive Craig Donohoe said he believed increasing competition between global exchanges and other inter-bank dealers would prevent regulators from stepping in to block the deal.

"We've been very well advised by the Department of Justice on antitrust issues, and we're not expecting any regulatory issues," he said.

Exchanges around the world are combining, in part to cut costs in response to pressure for lower trading costs.

The New York Stock Exchange has agreed to merge with with Euronext, owner of the Liffe futures exchange, and the London Stock Exchange is being wooed by Nasdaq.

The Chicago exchanges' merger will help them compete with Intercontinental Exchange, which owns Europe's biggest energy market and which agreed last month to buy the New York Board of Trade.

Both exchanges were started in the 19th century. The CME, known as the Merc, opened in 1898 as a trading post for butter and eggs. The CBOT's history dates to 1848 when it began exchanging contracts for future delivery of flour, timothy seed and hay.

CBOT demutualised and floated last year, and soaring trading volumes and excitement over industry consolidation have pushed the shares up from its initial US$54. The takeover price was set at US$151 in CME stock or with a part-cash alternative.

CME shares are at a record high in anticipation of an acquisition that will boost the pool of liquidity and the breadth of derivative products.

Last month was its second busiest month ever, with overall trading up 15 per cent on the year before.

The company has long expressed an interest in consolidation and has flirted with several other exchanges. Recent rumours have linked it to the Intercontinental Exchange and Deutsche Borse.

- INDEPENDENT