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CME shares fall to a 2-year low; Sharp decline in trading volume cited

By Joshua Boak | Chicago Tribune Reporter

 

July 2, 2008

A sharp decline in June trading volume pushed CME Group stock to its lowest point since the start of 2006, further slashing the value of it ever-shrinking bid to acquire the New York Mercantile Exchange.

CME Group shares closed down 6.2 percent Tuesday, at $359.39, a little more than half of what the parent company of the Chicago Mercantile Exchange and Chicago Board of Trade was worth in December.

When CME Group announced negotiations in January to buy the Nymex, it offered a combination of cash and stock valued at more than $11 billion, or $119 per share.

The stock slid in the following months amid questions about federal opposition to futures exchanges owning clearinghouses, eroding the value of the deal to an unacceptable level for some Nymex shareholders and members whose votes could decide its fate. The plunge in CME Group shares Tuesday reduced the deal to about $7.85 billion, roughly $3 per share above Nymex's closing price of $80.46.

CME Group recently attempted to entice Nymex shareholders with plans for a $1.1 billion share buyback and a special $5-per-share dividend, a strategy that failed to charm some with stakes in the energy and metals futures exchange.

"A buyback will not add long-term value to the deal, and the price still undervalues Nymex," Cataldo Capozza, a Nymex shareholder suing over the deal, said last week.

CME Group's efforts to buy Nymex now face an additional challenge, as volume on its interest rate contracts fell 17 percent in June compared with the year prior. Total volume fell by 4 percent for the month.

While many associate CME Group with contracts on corn, pork bellies and soybeans, interest rate products such as futures on the 10-year U.S. Treasury bond make up more than half of its daily volume of 12.4 million contracts.

Investors who traditionally used the contracts to hedge against changes in the economy have become hesitant to continue buying them because of uncertainty about the direction of interest rates that now move in a very narrow range, said John Welsh, senior vice president for the Chicago-based brokerage PFGBEST.com.

"It's a tug of war between inflation and deflation," Welsh said. "On one side of the street we've got deflation in terms of real estate. And on the commodity side of the street we've got inflation."

If the economy faces inflation due to high oil and food prices, the Federal Reserve likely would raise interest rates to limit the availability of money and reduce the threat of escalating expenses. And if prices start falling as they have for houses, the Federal Reserve would want to lower the interest rate to boost the amount of money in the economy and spur spending.

CME Group still has strong ratings from many analysts, with Howard Chen of Credit Suisse saying Tuesday that there is a "meaningful upside" to the diverse products, technology and balance sheet of the company.

The volume for foreign currency and equity futures increased last month at CME Group, although the biggest surge in the Chicago markets occurred in options to buy or sell stocks, indexes, exchange traded funds or market volatility at a later date.

The Chicago Board Options Exchange reported a 39 percent increase in volume, to 4.9 million contacts a day in June. Given the options industry's focus on seminars for investors, CBOE Chairman and Chief Executive William Brodsky foresees continued increases in options as more investors learn the trading strategies.

"We have an enormous pool of stock market investors out there, where if they learned about options they could be a lot better off," Brodsky said.

jboak@tribune.com