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PFG Chairman letter to the editor of the Wall Street Journal on the subject of exchange mergers.

FROM: Wall Street Journal
May 7, 2007

In Futures Trade, New York Battles Chicago

In response to your April 11 editorial "The Future of Futures," I support your contentions and note that the Futures Industry Association (FIA), in two recent blasts against a proposed merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, does not speak for our industry as they claim to do (Letters to the Editor, April 18).

As the CEO of one of the nation's largest retail futures brokerage firms, it is my strong belief that the CME-CBOT merger would provide many benefits to the customers we serve from hundreds of offices in some 80 countries. And this merger is a necessity for Chicago to remain competitive in a global market.

When the deal was first proposed last year, I speculated in SFO magazine that the Justice Department might become a tool for those interested in scuttling this deal, perhaps with an anti-trust lawsuit. I believed then and now that the biggest threat probably came from the New York investment banks whose representatives make up the great majority of the board of the FIA. These institutions have a history of trying to ward off competition from Chicago. The securities industry lobbied successfully against sensible rules for single stock futures rules that would make the new product attractive to trade. By hampering its potential popularity, they protected their markets from Chicago exchanges' competition.

Now, in its probe of the CME Group merger, Justice seems to be reacting to the FIA's lobbying, as the FIA decries that by concentrating significant power in Chicago the combination of the world's two largest and most successful futures exchanges might reduce competition or raise the barrier to entry for new competitors.

The FIA does not represent the best interests of the futures industry with this stand nor in general. The association purports to be an advocate for all futures firms, but its board is dominated by the big New York investment banks and the global wire houses. The organization had its roots in New York, where it was founded in 1955, and it has always given short shrift to Chicago, the home of the U.S. futures industry. It has been unwilling to include retail brokerage firms and CTAs in its strategic planning and in setting its agenda.

A powerful merged exchange in Chicago will be an enormous threat to the FIA's supremacy as a lobbying power in Washington and as a player in the industry. The New York investment banks have held sway over government for many years, and the Chicago exchanges have had to fight tooth and nail to keep these banks from stepping on their toes.

The CME-CBOT merger presents enormous benefits for futures customers and in turn the firms with whom they trade. Customers will have access to a wide range of products on one trading platform. This is increasingly necessary as more and more individual traders branch out in adding more products to their portfolios. Even FIA acknowledges the merger could bring cost savings and operational efficiencies to firms and their customers.

I disagree that the merger will "substantially" lessen competition between U.S. exchanges. Any disadvantage to smaller or newer exchanges will probably be about the same under a merged CME entity. Separately, the two exchanges held relative monopolies in the products they traded because each exchange was home to the liquidity in those products. I do not believe an exchange can be a monopoly, but that it can control virtually all of the trading in a given product if it provides the liquidity. It is a well-known fact that it is quite difficult for any exchange or a copycat product to compete with established liquidity.

The CME-CBOT merger will increase international competition in derivatives markets and make the U.S. a stronger participant in that competition.

Russell R. Wasendorf
Chairman and CEO
Peregrine Financial Group