The Merc and the CBOT: Together at Last

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At a press conference hearty with mutual congratulations among the bleary-eyed executives of both exchanges, CBOT officials admitted that the deal is necessary because global consolidation among exchanges is making it tougher for smaller entities to compete. "A combination makes us both able to compete as global players," said CBOT Chairman Charles Carey, whose grandfather and uncle preceded him as chairman of the hoary old exchange and whose father traded at the place. "We are facing unprecedented global competition."

COMBINED FLOORSPACE

All across the world, exchanges are busy in a global game of matchmaking to increase their holds on their markets. The New York Stock Exchange (NYX), which recently absorbed the Chicago-based Archipelago exchange, has agreed to combine with Europe's Euronext marketplace, which will make it a global player in at least European futures, along with stocks and options. The NYSE is vying with Europe's Deutsche Börse exchange over Euronext, which is figuring that an all-European exchange would trump the U.S. markets. That contest will likely be decided with a shareholder vote in December. Meanwhile, Nasdaq (NDAQ) is trying to take over the London Stock Exchange and has bought about 25% of it, though executives of the LSE are declining Nasdaq's advances.

Indeed, analysts say the Merc's takeover of the CBOT makes more sense than the transatlantic deals. For one thing, the Merc would shut down its trading floor, now in leased space in Chicago, and combine with the CBOT's operations, saving some overhead instead of running parallel trading venues as the NYSE and Nasdaq plan to do. "The natural progression has been toward shrinking floors," says Richard Herr, an analyst with the brokerage firm Keefe, Bruyette & Woods.

TRICKLE-DOWN SAVINGS?

As the Merc's market value has soared with its stock price, Wall Street has been wondering why it hasn't moved faster on potential takeovers. The exchange "has been criticized for not pulling the trigger and not being vocal enough about doing deals," says Herr. He praises management there for waiting for the best deal possible, noting that the exchanges promise the deal will pay off in earnings gains in 12 to 18 months after closing. The exchanges are anticipating that workforce reductions and cost cuts will save some $125 million for them both.

For now, the deal is drawing mostly praise. "It's a very clever move," says William Cline, a managing director at the consulting firm Accenture (ACN), saying the deal locks in Chicago as the global center for futures trading.

But plenty of market players are going to press for lower costs, not higher ones, as a result of the deal. "We hope the savings will be passed on to the customer," says Randy Frederick, director of derivatives for Charles Schwab & Co. (SCHW). If they're not, the greater monopoly power the single futures exchange will have will be sure to cause problems with regulators and traders alike.

Weber is BusinessWeek's chief of correspondents.