Futures Shock: Chicago Merc to Buy Board of Trade; Linkup of Old Rivals Shows Fast Rise of Derivatives And Electronic Trading; Biggest Yet in a Merger Wave
The Chicago Mercantile Exchange Holdings Inc. and the Chicago Board of Trade agreed to join forces to form the world's largest financial market, one that will dwarf exchanges in the U.S. and Europe -- even the New York Stock Exchange.</br></br>The Chicago Merc announced plans to buy the smaller CBOT Holdings Inc. for about $8 billion. As the biggest deal yet in a global consolidation of the financial-exchange industry, the plan sets aside more than a century of crosstown rivalry.</br></br>The agreement reflects the rapid growth in the investment industry's hottest sector: derivatives, or contracts whose value is derived from the movements in other financial instruments such as stocks and bonds. The linkup will make trading in many such derivatives a simpler matter, while also raising concerns that the increased power of the combined exchanges could lead to higher fees for traders.</br></br>Having grown far beyond their roots in putting together buyers and sellers of eggs, butter and corn, the Chicago exchanges, together, will trade some nine million futures contracts a day. Futures contracts give investors the right to buy or sell something later at a set price. Thus, they are used to hedge risk, allowing investors to enjoy smoother growth of their assets without the bumps that come with simpler investments on, say, a portfolio of stocks.</br></br>"Chicago used to be known as the hog butcher of the world. The city now will be known as the world's risk manager," said John F. Sandner, a Chicago Merc board member.