Things appear to be heating up with the competition for being the merger partner of the Chicago Board of Trade (BOT). The latest development had the Intercontinental Exchange (ICE) making a $10 billion bid in an effort to get them away from the Chicago Mercantile Exchange (CME). This particular bid would out-bid the original of $8 billion by the CME for the Chicago Board of Trade, which took place back in October.

ICE, which is based out of Atlanta, primarily trades energy contracts and most analysts think their latest bid shows that the CME and BOT merger will probably not survive regulatory scrutiny. The ICE merger proposal would have the Chicago Board of Trade's shareholders owning 51.5 percent of the combined company and would have the headquarters in Chicago, with the current ICE CEO running the company. The CME proposal, on the other hand, currently would only have the Board of Trade shareholders receiving just 31 percent of the company.

The question now is, just how and what will the CME's counter offer be? It's likely to be coming through shortly, given all the resources they have invested into this effort thus far. According to exchange officials, shareholders from both Chicago exchanges are scheduled to vote on the merger on April 4, with an expected closing of the deal by the middle of the year. Interestingly enough the ICE bid factors in a required $240 million breakup fee if the Chicago Board of Trade walks away from the Chicago Mercantile Exchange's offer.

Analysts that follow the exchanges point out this latest bid by ICE for the Board of Trade goes to show just how excited investors are for the ever growing market for financial derivatives. Currently only 17 percent of global derivatives are traded on exchanges, with the rest occurring between banks or other big financial market participants. According to the consulting firm Accenture, the potential is present to construct a derivatives exchange that is five times larger than anything out there now.

The reason that ICE made sure that the Chicago Board of Trade would remain in Chicago is due to the fact that politicians in that city have been praising the planned combination of the two exchanges since it would signal the growing importance of Chicago as a center of global finance. The merger would also allow them to better compete against global players such as Deutshe Borse and the New York Stock Exchange. In addition to ICE's proposal to have the exchange to remain in Chicago they would plan to keep the Chicago Board of Trade name as well as create a new identity for its regulated exchanges in New York, London and Dublin.

Now the only thing that remains is to see what entity ends up absorbing the Chicago Board of Trade. Will it be the Intercontinental Exchange or the Chicago Mercantile Exchange? One thing is for sure though, look for more maneuvering and bidding activity before everything is finally settled upon.

Happy Trading.


Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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