Why ICE May Win the CBOT

The upstart futures exchange has trumped the Chicago Merc in its bid for the Chicago Board of Trade—and the offer could allay antitrust concerns

by Joseph Weber

Barely two months after shaking up the futures-trading world by paying $1 billion to take over the New York Board of Trade, IntercontinentalExchange (ICE) Chief Executive Officer Jeffrey Sprecher is riling the markets anew with his $9.9 billion stock offer for the Chicago Board of Trade (BOT). The surprise offer, announced Mar. 15, stunned executives at both the Chicago Mercantile Exchange (CME) and the CBOT, who have been laboring to close their $8 billion merger.

Sprecher's offer, which is expected to trigger a higher counterbid from the CME, is still more evidence of fast-moving consolidation in the stock and futures-exchange worlds. Gains in computerized trading are reshaping bourses, from the New York Stock Exchange (NYX) and Nasdaq (NDAQ) to the Chicago markets themselves, and all of them are vying to draw traders to their increasingly speedy marketplaces. Sprecher, a former race-car driver and chemical engineer, built Atlanta-based ICE just seven years ago by giving energy and commodity traders an all-electronic alternative to the floor trading that had long dominated the field. Traders have flocked to ICE for lower costs and split-second executions.

Chicago Merger's Red Flags

The two Chicago exchanges, no slouches to modernization even though they both still provide floor trading as well as electronic trades, announced their merger plans just last October. Their deal, which is slated to go before shareholders in April and would close by mid-year, would create the world's biggest derivatives bourse by joining markets that have operated just a few blocks from one another in Chicago—often battling fiercely—for more than a century. Sprecher would keep the CBOT in Chicago, moving his headquarters there, while making the CBOT an even scrappier rival to the larger CME.

Executives at the CME, caught flat-footed by the all-stock offer, say they're sticking by their plans. "We are confident that the CME-CBOT merger will create a strong combination and provide significant and unique benefits for shareholders and customers of both companies," the CME said in a hurried statement. "We are working toward the successful completion of our transaction." Officials at the CBOT said they would review the offer, but pointedly said their planned shareholder vote remains scheduled for Apr. 4.

Much as his offer is roiling the waters, Sprecher's plan would solve a few big problems that are plaguing the all-Chicago merger plans. For one, it would moot antitrust concerns that have haunted the CME-CBOT plans, since the two Chicago exchanges together would control some 85% of the country's futures trading. An influential customer group, the Futures Industry Assn., last month came out against the CME-CBOT deal, saying it would "substantially lessen competition among U.S. futures exchanges, and raise even higher the barriers to entry for new competitors."

ICE Deal Would Add Diversity

The Justice Dept. is now reviewing the CME-CBOT plans and has been questioning many market players about the antitrust issues, industry sources have told BusinessWeek. Sprecher underscored sensitivity about the issue in his offer letter to the CBOT, predicting that "the futures industry and antitrust regulators will embrace" his deal over the "significant concentration of market power" that the CME-CBOT deal would cause. By contrast, he said, his deal would be "strongly pro-competitive."

The biggest problem for the CBOT-CME combination is that it would concentrate the trading of financial futures in one place, with the CBOT chipping in its huge operation in Treasury securities trading, while the CME contributes its extensive complex in interest-rate products and other financial instruments.