Press Room

« Back to current press releases


April 20, 2007

DJ Futures Market On CBOT Bidding War Launches, Starts Slowly

By Howard Packowitz

CHICAGO (Dow Jones)--A futures market tied to the battle for control of the Chicago Board of Trade produced few participants on the first day of trading Friday, but some market watchers are still optimistic that liquidity will build as the market becomes a real gauge of expectations for the CBOT bidding war's outcome.

The Chicago-based U.S. Futures Exchange, formerly Eurex US, launched CBOT Merger Binary Futures, its first product since Man Group PLC (EMG.LN) paid $23.2 million for a 70% stake in the all-electronic exchange.

Last month, Atlanta-based IntercontinentalExchange Inc. (ICE) made an unsolicited bid to purchase CBOT parent CBOT Holdings Inc. (BOT). ICE is competing with a deal between Chicago Mercantile Exchange Holdings Inc. (CME) and CBOT reached in October.

The new market, which trades from 8:15 a.m. to 5 p.m. ET, enables participants to bet whether CBOT shareholders will accept the ICE or CME proposals. The product is binary in that it offers traders either a $1,000 per contract payout if they choose the ultimate merger outcome, or no payout if they're incorrect.

USFE is initially targeting retail or small-scale investors to participate in the market. Russ Wasendorf Jr., chief operating officer of the Peregrine Financial Group, a retail brokerage firm, expects bigger players will take part if they see sufficient retail involvement.

"It's timely, it's newsworthy, and it's something that people are going to be watching," Wasendorf said.

Lack of volume in the early going diminishes the impact of market expectations, he said. However, he believes as liquidity builds, parties involved in the merger plans will have to pay close attention.

"It's public opinion turned into dollars," Wasendorf said.

He added that the willingness of people to bet their money reflects a "better indication on what the end decision will be."

About seven hours into the first trading day, USFE's Web site indicated that just 10 contracts had changed hands. Based on the bids and offering prices, the market reflected a 57% to 69% chance for the CME deal to go through, versus a 29% to 35% chance that the ICE offer will win out.

Friday's launch also underscores a new direction for the futures industry, as exchanges design markets for speculating or hedging risk on the probability of various events, according to David Boberski, head of interest rate strategy at Bear Stearns.

In a trade note published Thursday, Boberski said USFE's first product "tests the appetite of futures traders to take a step closer to the credit derivatives world, where options on credit events like default swaps have grown by leaps and bounds."

CME, for example, is seeking regulatory approval to begin trading credit index event contracts before a planned May 6 launch. The CME index of 32 North American companies would be the first exchange-traded index product protecting investors against the possibility of bankruptcy and default.

-By Howard Packowitz, Dow Jones Newswires; 312-750-4132;

04-20-07 1517ET
Copyright (c) 2007 Dow Jones & Company, Inc.