CME’s Missing Response on NYSE-Deutsche Boerse Merger Not a Concern
Recently speculation arose that CME Group (NYSE:CME) might submit a counter bid for NYSE Euronext (NYSE:NYX) to disrupt the NYSE-Deutsche Boerse merger. CME is the world’s leading derivatives marketplace and offers a wide range of products across all major asset classes including futures and options based on interest rates, equity indices, foreign exchange, energy, agricultural commodities, metals, weather and real estate. It also provides clearing and settlement services for exchange-traded contracts and over-the-counter derivatives. Its main competitors historically have been NYSE Euronext and Nasdaq OMX (NYSE:NDAQ) though newer exchanges like BATS Global and Chi-X as well as global exchanges are starting to take market share.
We have a price estimate of $330 on CME Group’s stock which is about 5% above the current market price.
Merger Mania Among Exchanges
Stock exchanges around the world have been partnering or merging with other platforms to save cost and compete better against the newer electronic exchanges, which are reducing the barriers to entry for trading. The volume of transactions processed is an important metric for exchanges as the incremental cost of processing transactions after the setup of technological infrastructure is very low.
CME Group is unlikely to bid for NYSE Euronext because the stock trading business of NYSE is a low margin and highly competitive business. Futures and other derivatives trading is a much higher growth and higher margin business for exchanges. In addition, CME specializes in futures trading and is regulated by the Commodity Futures Trading Commission (CFTC), and if it acquired NYSE, it would be subject to Securities and Exchange Commission (SEC), which could impose additional restrictions on its current business. [1] A potential merger between CME Group and NYSE Euronext could also spark antitrust concerns as the combined entity could have a significant presence in the U.S. derivatives market. Additionally a CME and NYSE merger would also keep the focus in the U.S. when much of the growth opportunity lies in international markets such as Brazil, India and China.
We currently feel that the threat to CME Group from the merger of NYSE Euronext and Deutsche Boerse is low as CME already competes with them individually and still managed to increase its average daily volume of energy contracts, its most valuable segment in our estimates, from 1.35 million contracts in 2008 to 1.67 million in 2010. We expect the trading volume to continue to rise sharply to about 2.3 million contracts by 2013 due to an increase in volumes and in algorithmic trading.
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