CME and DeutscheBorse

Posted by Jeff Carter
on February 26th, 2013

Don’t believe the press. They are chatting. But, exchanges always chat. It goes back to the 1980′s with all the meaningless “memorandum of understandings” exchanges did with each other before they all went public and embraced electronic trading.

There are significant hurdles to a tie-up between the two exchanges.

Politically, it will be tough for the Germans to be bought by an American exchange. The success of Eurex was determined by the ethnocentric effort of German bankers and the German government to wrest control of the German interest rate futures that were successfully being traded in London on LIFFE.

Basically, they trade interest rate futures and a stock index contract. But they dominate. Euronext/LIFFE has been unable to put a dent in their control. On the other hand, Euronext/LIFFE owns the short end with its Euribor contract.

ICE ($ICE) purchasing the NYSE ($NYX) is causing CME’s ($CME) consternation.

Short of an outright purchase by CME, there are other things each exchange can do to protect itself from competition from ICE.

The first thing that comes to mind is a cross margining agreement between clearinghouses. This gives capital efficiencies to massive worldwide banks and allows them to either increase their volume at both exchanges, or deploy capital in different ways to create value.

Remember, the commission paid on trading is not really the true all in cost of trading.

They may do a pilot program granting some sort of access to each other’s markets for a special tier of market participant. This creates more interplay and arbitrage opportunities between products.

There is a specific problem any pan American/EU exchange would encounter and that is the tricky thicket of regulation and taxes. Now that the EU wants to tax transactions, some sort of tie up with an American exchange might provide an escape valve for European traders.

If you have been following the soap operas in the exchange world, you know that the strategy behind every move is made with regard to futures and over the counter products. It’s where the money is. Government regulators on both continents have written regulation so that the stock business is barely profitable.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.