Merger of exchanges may hit snag
CHICAGO -- Shares of CME Group Inc. and Nymex Holdings Inc. plummeted Wednesday after the Department of Justice raised concerns about regulations governing the trading of financial futures -- putting the proposed $11 billion combination of the two exchange firms in doubt.
In a submission to the Treasury Department, Thomas O. Barnett, assistant attorney general in Justice's antitrust division, argued that the regulatory framework surrounding clearance of financial futures stifles competition and hampers innovation.
The letter prompted a huge selloff in the stock of financial exchanges by nervous investors.
CME Group's shares, which had grown 20-fold when it reached the five-year mark as a publicly traded firm in December, plunged $103.55, or 17.6 percent, to $485.25 in Wednesday trading.
Nymex Holdings Inc., which CME is considering buying for about $11 billion, fell $18.78, or 17.6 percent, to $87.88 after touching $86.61, the lowest price since the stock debuted publicly in late 2006.
CME Group, which runs the Chicago Mercantile Exchange and the Chicago Board of Trade, hosts trading of futures contracts, which allow investors to bet on swings in prices for things like gold, oil or wheat.
Most of its $1.8 billion in annual revenue comes from charging fees to host and clear trades on its floor.
BMO Capital Markets analyst Michael Vinciquerra said investors may have overreacted since nothing may come of the letter.
"The letter has obviously had a serious adverse impact on shares of the U.S. futures exchanges. While this is understandable as investors try to dissect the real threat to the exchange's business models, the concern seems likely to prove overblown," he said in a research note.
Barnett said under the regulations governing trading of financial futures -- or contracts tied to the direction of interest rates -- exchanges clear the trades executed on their own floors. Clearing a contract means ensuring that the owner is paid if the contract is in the money.
Because CME Group clears financial futures itself, it is very difficult for competitors to launch similar contracts on other exchanges, Barnett said. Without a clearance house, brokers cannot find the trading volume or liquidity on other exchanges to ensure efficient prices, he said.
If the structure were changed to allow more competition for clearing financial futures, Barnett said, it could lead to better prices and heavier trading volume.