Merger Mania

by Kevin Kerr

Would you like to supersize? Super, mega warehouse!!! It seems these days that everywhere you look, bigger is better. We’ve seen the demise (more or less) of the local hardware store, little independent gas station, neighborhood drug store, etc. Some say it’s a shame, others welcome it as progress.

As with everything in life, it depends on your outlook.

The recent state of mega-mergers of the major commodities exchanges like the CME and CBOT and the NYBOT and ICE is a sign of an industry that is evolving, becoming more efficient and more technologically advanced. All of these things should serve only to facilitate commodities trading to move to the next level and further benefit more investors in the worldwide marketplace.

Cost cutting and efficiency are the watchwords for the commodities exchanges as they increasingly go public. Shareholders demand results, and by merging with former rivals, they accomplish many things.

Let’s face it – like it or not, the exchanges have shifted from open outcry pit-driven business, like when I worked on the floor, to electronic-based 24-hour global trading. It’s a simple fact that trading electronically is here and here to stay. The exchange can now combine technologies, cut trading costs and lure in billions more in worldwide business.

Wall Street loves mergers and has been very receptive, indeed. Soon after the announcement, shares of Chicago Board of Trade Holdings Inc., which only just last year had its IPO, rallied 13% to close at $151.99. On that same note, Chicago Mercantile Exchange Holdings Inc. shares increased 2.3%, to $515.50.

The only people complaining in this whole merger madness are the trading floor workers and the “local” traders. A local trader is a person who trades for his own account on the floor. They usually do what is called “scalping.” No, it’s not like the ticket guy who sells you Super Bowl tickets in the back alley. This kind of scalping entails the local shaving off of a little bit of each price in the pit. By doing so, the local adds much-needed liquidity and volume to the market. We call this “price discovery.” The problem is, in an electronic market, there is really no need for locals, as the market is so fast and so efficient that locals are obsolete. On the chopping block too are all the exchange floor employees. Phone clerks, reporters (who monitor prices on the floor), runners (who run the tickets back and forth), etc., etc.

These jobs will most certainly be lost and the exchange floors consolidated, and perhaps one day completely closed. Since I worked on the floor for years, it makes me very sad to admit it… It’s the end of an era.

All of this is good news for the average investor, because it means more liquidity and more efficient trading and marketplaces. Commodities exchanges have been desperate to consolidate to lower trading costs and make buying and selling easier, to attract new investors, and now they can.

The exchanges say that all of this increased savings will result in better trading systems and offer more progressive futures contracts. Those on the other side of the argument say it will eliminate the process of open outcry and take away the human side of commodities trading. Whatever side of the argument you’re on, there is no stopping progress.

The quaintness of the open outcry trading pits will likely never disappear completely, just as the little hardware store near my home in Connecticut still gets a visit from me at least once a month because I dread going to Home Depot. I think the same is true for the futures trading pits.

Editor’s Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis.  Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.