Wednesday, June 29, 2005

The CME, CBOT, and the Wardrobe

Today's CME movement, largely attributable to a call from Jeffries for the stock to trade at $344/share (nice round number), is predicated on the assumption that they'll be taking out CBOT and accreting earnings in short order.

All this from the
CBOT's disclosure that it recently received an expression of interest in a business combination from an undisclosed party. To be sure, this is one way to stimulate interest in your company's IPO. They didn't say it was CME, but Jeffries did.

Harken back to April 22, 2005 when (historically proven contrarian) Charlotte Chamberlain from Jeffries told us that AX would "underperform" when the stock closed at $16.85. With AX sitting at more than twice that on 6/29/05 there's (even more evidence) that this clown hasn't a clue when it comes to innovative financial service offerings.

First, the CBOT is not a public issue and therefore is not bound by the same regs as public companies. There won't be any audit to check the validity of an offer, but lets assume there was an offer. CME would be in the running, the Philly Exchange would be in the running, and Arca/NYSE, as well as Nasdaq/Inet would have to be considered potential buyers. Nonetheless, Jeffries couldn't say that AX might've been the offer that the CBOT received because that would blow their call entirely -- the Street might wonder how did she not see this coming on 4/22/2005.

I'm not claiming that AX made the CBOT an offer, I am just making the point that there is simply no fact that the CME is who expressed interest in buying the CBOT -- yet the stock took off with the notion that it could be. Maybe it's because they're both housed in Chicago that Jeffries figures it'd be CME.

AX announced yesterday that they are going to offer penny pricing for options -- that'll make them the first to do so (others use .05 or .10 increments). This means that margins are going to be squeezed even more, so volume will have to make up for things. AX knows that market share is the name of the game (see my previous blogs from many months ago), and they'll end up winning share in the options market -- taking away from those exchanges that don't use pennies. They've (we've) demonstrated their (our) ability to make a splash in trading everything from CPU power to options to ETFs. These guys are trailblazers and have demonstrated the ability to execute. How many options exchanges do we really need? For that matter, how many stock exchanges do we really need? Try to think ahead 20 years to how the NMS will look. Recall that at one point, putting phones on the floor of the NYSE was revolutionary. Disseminating market data to centers around the world was an incredibly revolutionary occurance when the NYSE first began doing so (also a new stream of revenue for the exchange).

Look here (scroll down to the PPT slides) for a timeline of innovation in the US equity markets. In 1964, new high-speed tickers (twice as fast as the old ones) were installed at the NYSE. Point being, the NYSE does innovate and when they do, they improve the national market landscape. By merging with AX they are able to continue their long-standing tradition of being leaders in the markets they serve.

If you have a second, please post a comment here regarding what you think would happen if it becomes known that it's AX that's after the CBOT. . .


Anonymous Anonymous said...

Agree. Totally! A 1st grader can be as accurate as Jeffries. Thanks for your blog, it's awesome!

6:38 PM  
Anonymous Anonymous said...

the deal with pacific hasn't closed. the deal with nyse won't close until late this year or early next. a bid for cbot by ax will 1) take 1 yr or more to clear the regulators(cftc and sec) 2) probably dilute ax share price 3) if 2 occurs could see a cme bid for ax(notwithstanding point 1).

9:47 PM  

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