Chicago Futures Markets Under Pressure to Merge
World's risk-management capital sees lower trading volume, rising rivals
CHICAGO — IF some marriages seem made in heaven, then the merger of the world's two largest futures exchanges - the Chicago Board of Trade and the Chicago Mercantile Exchange - could be made in the pit. The futures trading pit, that is, the human conflagration of shoving, shouting, and fiery deal-making.
The chairmen of the two exchanges, reacting to a trading slump and rising competition from foreign markets and other US futures markets, met Tuesday to explore the possibility of a merger, according to David Prosperi, a spokesman at the Chicago Board of Trade (CBOT). But if three other fruitless efforts to combine since 1979 are any guide, it will be a drawn-out courtship at best.
A merger would achieve ''an economy of scale that makes wonderful sense, but the exchanges have sniped at each other for a long time and every time they have tried this it has gone awry,'' says Clark Heston, a private consultant and executive director of the Risk Management Center of Chicago.
Now, however, pressure from constituents at the exchanges and competition from both computerized trading and burgeoning foreign markets are pushing the two exchanges together. Even if the markets spurn a marriage now, they will probably have to combine at least some of their business in the future, analysts say.
Leader in derivatives
Eventually, a huge combined market will be an irresistible way to safeguard both the estimated 100,000 jobs in Chicago tied to the futures markets and the city's position as the world capital for risk management, they say. (A futures contract is an agreement to deliver or accept a quantity of a commodity at a future date. Many businesspeople use such contracts, known also as derivatives, to offset the risk of price changes in commodities and financial instruments they hold, ranging from cheddar cheese and broiler chickens to Treasury bills.)
A decline last year in the annual total trading volume at the two exchanges has helped amplify calls for a merger, especially from large dealers known as futures commission merchants (FCMs). Volume last year shrank about 8 percent at the Mercantile exchange and 5 percent at the CBOT from 1994.
Although the exchanges say the downturn will pass, some major dealers believe it foreshadows a long period of stagnant trading in some key futures contracts. The slump stems in part from progress toward a balanced federal budget, declining inflation, and the fall of long-term interest rates. The trends have eased the price and interest-rate volatility that drives trading in many futures contracts, say dealers and industry analysts. Some brokerage firms have been downsizing their commodities-trading staffs.
''There is a sea change at the exchanges,'' says Leslie Rosenthal, managing partner of Rosenthal Collins Group, an FCM. ''It is quite possible that if you have a balanced budget in seven years you are technically speaking not going to be issuing new debt, and if that's the case what do our markets move on?''
A merger would help streamline trading and ultimately reduce the costs for FCMs, which have been pinched by the shrinking market for some futures, say major dealers. Indeed, a CBOT task force suggested a merger in a recent report, noting that some of Chicago's competitors in New York and London are already involved in tie-ups. Savings from a combination of clearing operations, product development, technology, and marketing could annually total $32.7 million, according to the task force.
The two exchanges have been driven together by another disturbing trend: Their standing among rival markets has eroded even as their combined daily average trading volume has more than tripled in the past decade. Chicago's share of worldwide futures transactions has slumped from 39 percent in 1985 to roughly 26 percent last year, according to figures from the Futures Industry Association in Washington.
Chicago has also lost business to customized deals in derivatives by corporations and banks. Moreover, computerized trading that bypasses the raucous ''open outcry'' of the trading pits has undermined market share, say analysts.
Consummating a tie-up will be very difficult. The exchanges are vastly different in their cultures and membership. And they have competed fiercely for years. Executives at each exchange routinely trumpet in public the weaknesses of the other.
Gradual merging predicted
''It is an idea everyone would endorse but it would be very difficult if not impossible to achieve,'' Mr. Rosenthal says. A merger would only come about incrementally, say analysts and industry players. For now, cooperation consists of a joint representative office in Tokyo, joint lobbying in Washington, and an advertisement together on a billboard at O'Hare International Airport here.
Still, says Mr. Prosperi at the CBOT, ''the time will come when the leaders of each exchange feel a merger is in the best interest of the membership, in terms of providing more trading opportunities and enhancing the value of a membership at each exchange.''