With CME Group winning the lion's share of votes from the New York Mercantile Exchange members to acquire its parent company NYMEX Holdings on Monday, the mammoth futures exchange is closing another chapter in the exchange consolidation race.This time, Chicago's derivatives powerhouse will strategically add global energy and precious metals products to its coverage, further solidifying its dominant position in interest-rate, foreign exchange, stock index and agricultural futures and options on futures.
But now that the NYMEX-CME deal is set to close on Aug. 22nd, CME will need to turn its attention to technology integration and cost savings.
Both companies have promised $60 million in cost savings - half of which would come from technology savings. One assumes the bulk of that could come from consolidating trading floors. However, both companies said it would run trading floors in New York and Chicago if the New York trading floor met certain profit targets.
"This is a defensive move by CME. They're acquiring another U.S. exchange with an asset class fairly similar to what they trade now," comments Michael Henry, the head of Accenture's financial services strategy practice in North America.
Since NYMEX has listed many of its products to trade on the CME Globex electronic trading platform, integration should be relatively easy, says Henry.
On the other hand, integration isn't always as easy as it looks. And after the champagne corks are popped and the deal is inked, the real work begins.
But CME has already proved itself successful at integrating mammoth exchanges. It was only last July that CME Group was formed following the $11. 9 billion merger between the Chicago Mercantile Exchange and its rival the Chicago Board of Trade (CBOT). That victory followed a nail-biting-takeover battle with the IntercontinentalExchange (ICE).
Aside from the strategic advantages of owning an energy and metals exchange, another reason for the $9.4 billion deal is to keep NYMEX out of the hands of the ICE or another rival such as NYSE Euronext.
But if one believes that the exchange business is going to consolidate into three or four global players, says Accenture's Henry, then the CME needs to do something more ambitious, says the consultant.
In Henry's view, CME needs to show it can extend asset classes, purchase a cash exchange or a global marketplace. "This is not the Nasdaq acquiring OMX or NYSE acquiring Euronext," he says. If CME would like to compete with these groups, Henry says CME has to do something more ambitious. "The NYMEX purchase is fairly conservative, defensive move. It's a local move. It just more derivatives products," he adds.
Of course, CME wants to compete with these exchange conglomerates. While there is a defensive element to the NYMEX deal - I think it's an extremely smart move. CME has shored up the entire asset class - with NYMEX in its corner, CME Group has 95 percent market share in U.S. futures and futures on options volume, according to published reports. Though it faces competition from broker-led electronic upstarts like ELX and Project Rainbow, the scale of CME-NYMEX combined with CBOT would make it difficult for a new entrant to gain critical mass.
But NYMEX is not the end game. So the question is which exchange will CME acquire next? Henry suggests that CME look east to Tokyo, Singapore, Hong Kong, or Shanghai. Since CME already has business relationships with these fast-growing exchanges, that could make sense. "Let's say they did an alliance with London Stock Exchange and Shanghai Stock Exchange, then they would be in the same league as these other guys," posits Henry referring to Nasdaq OMX and NYSE Euronext.
While CME has snapped up all the local prey in futures, there are still a few big fish around and not all of them are publicly traded exchanges. CME could also look to OTC derivatives. Recently the ICE acquired Creditex for $625 million. In the exchange consolidation race, everything is up for grabs.While CME has snapped up all the local prey in futures, there are still a few big fish around and not all of them are publicly traded exchanges. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio