CME might pursue NYSE to stave off competitive threat

(Crain's) — CME Group Inc. is not commenting on reports that it might make a hostile counteroffer for NYSE Euronext, but the Chicago-based futures exchange has compelling reasons to keep the Big Board out of the hands of Deutsche Borse, if it can.

A Deutsche Borse-NYSE Euronext combination, which reports said could be announced Tuesday, would be a huge threat to CME. In a business where trading volume drives costs down and profits up, the CME handles 97% of U.S. futures trading, but it would be overshadowed globally by the combination of Europe’s two largest futures exchanges, NYSE Liffe and Deutsche Borse’s Eurex.

CME traded about 3 billion futures contracts last year, while NYSE Euronext and Eurex markets traded a combined 4.8 billion.

"Anything's possible," said Paul Zubulake, senior analyst for futures and options at Aite Group LLC, a financial services market research firm in Boston. "Would it make sense? Sure."

“We don’t comment on rumors or speculation,” a CME spokesman said. Reports on Fox Business News and financial news website theflyonthewall.com suggested CME might make a joint effort with Nasdaq OMX Group to bid for NYSE Euronext.

A tie-up with Deutsche Borse would add strength to NYSE Liffe’s plan to go head-to-head this year with CME in some of its biggest contracts, such as eurodollar and interest-rate futures.

While CME recently won approval for a London-based clearinghouse to help attack the European market, NYSE Liffe plans to launch a clearinghouse in New York for Treasury futures, one of CME’s biggest strengths. NYSE Liffe has teamed up with New York’s Depository Trust and Clearing Corp., which handles trillions of dollars in bond transactions in the cash market.

The ability to trade cash and futures markets in bonds on the same electronic trading platform could provide fast-moving opportunities to play one market off the other at a lower overall cost, creating stiff competition for CME.

“They are concerned about that joint effort,” said Mr. Zubulake. While he has no knowledge of a hostile CME bid for NYSE Euronext, “it makes sense from a big, big, big picture.”