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. . .

January 2006 $65 call premium -

Interesting take on the street's perception of a deal going through and the value of the new combined company -- the 65 Jan '06 calls are asking $1.00 as of 12:05 PM on 6/22/2005 when the stock is trading at ~$40.

The call is ~25 toytles outta the money. To be sure, catalysts leading up till then include: at least another rate hike (market should be relieved after the ninth inning), arca/nyse proxy will be released, regulators'll approve the merger, langone will be (even more) "long gone," analysts will start to understand the market potential (and press coverage will be heightened), NYSE Group IPO will be priced, nyse seat holders will sell their seats for (around) 70% of the new exchange, the NYSE will transform to a "for profit" company, and regulation nms will be digested.

In the meantime, Nasdaq/Instinet will be a larger ECN and a non-issue in the duopolical landscape (read the fifth to last sentence on). The NYSE Group should emerge as the most innovative market in the world and their (read: our) footprint will expand overseas as well as in the US.

Piper Jaffray as contrarian indicator -

Looks like the numskulls at Piper Jaffray think anyone trusts their opinion on Arca. Here are some examples of their most recent ridiculously wrong calls:

On May 4, 2005 Piper downgraded Arca from "outperform" to "market perform." The target price was adjusted to $31 from $24. Refresh your memory here: http://tinyurl.com/aaxxg

On September 23, 2004 Piper initiated coverage of Arca with a "market perform". The target price was set to $17. Read about this idiotic call here: http://tinyurl.com/awq8o

The table below depicts recent evidence of analysts that have lost all credibility as they have failed dramatically to understand Arca's business, market, and stock (yet still publish their ignorance for idiot retail brokers to use and mislead their clients).

Without further ado, here's a list of losers who've recently opened their proverbial mouths and removed any doubt that they haven't a clue. The truth is, a 4 year-old could be just as accurate as these clowns. When you're wrong, you're wrong.

Date	Knucklehead	Downgrade	Closing price that day (Today's closing price $39.53)
9-May-05	Keefe Bruyette	Mkt perform	$32.87
4-May-05	Raymond James	Underperform	$33.88
4-May-05 22-Apr-05	Piper Jaffray Sandler O'Neill	Mkt perform Sell	$33.88 $16.85
22-Apr-05	Jefferies & Co	Underperform	$16.85

ETFs and Arca/NYSE -

Dow Jones/MarketWatch has an article about the opportunity for Arca/NYSE to dramatically increase their market share in the $220 billion business of ETF trading (6/13/05).

As social security becomes more of a self-directed, "Lifetime Savings Account" ETFs are bound to increase in popularity.

Arca and event-stream processing -

To be sure, there is value in being able to digest, analyze, and act on huge flows of data on the fly, in real-time. There is a burgeoning technology called "event-stream processing", or "ESP," if you're cool, - and ArcaEx's is all over this in yet another example of management's prowess.

PC Magazine runs an article touching on this in the 6/28/2005 edition. Here's the article:
http://tinyurl.com/c34c5

Also, in case you haven't seen the 6/13/05 Journal: There's an article about the potential boom in deriviative activity and they discuss the NYSE ability to delve into these markets via its Arca deal. It'd be interesting to hear what Langone's idea for entering these markets is without Arca? It's becoming clearer each day that the NYSE will be ArcaEx with a new name.

Putnam for Time Man of the Year?

Sandler O'Neil's conference notes -

Here's a powerpoint presentation that AX gave on 6/7 @ the Sandler O'Neil Financial Services Conference (remember, sandler employs the incredibly-wrong analyst, Rich Repetto, that downgraded AX on 4/25 when they were trading @ 29 and change).

Note the slide, "Creating a Market for the Future."

The engines are just get getting started. This is one hell of a growth story!