Word leaked out, though the blushing couple had wanted to keep it secret: The Chicago Board of Trade and Chicago Board Options Exchange might marry.
Holy matrimony! Could this be true? We just saw them bickering like blue jays.
The options exchange threatened to cut off trading rights for CBOT members. The CBOT threatened to sue the CBOE. You call this romance?
Sort of. The CBOE and CBOT have agreed to explore merger possibilities. But they’re approaching the courtship with less optimism than Henry VIII’s fifth wife.
CBOT Chairman David Brennan last week expressed his intentions to CBOE Chairman Bill Brodsky in an anti-love letter. “As a sign of good faith, we will agree to postpone filing any legal action for a two-week period,” Brennan wrote. “If, after that two-week period, no material progress has been made, we will file our legal action.”
On such occasions, poetry generally beats legalese. Had Brennan tried verse, it might have read: “My love is like a red, red rose, and it better bloom damn soon.”
These talks have little chance of ending with merger vows. A judge’s gavel is more likely.
Board of Trade sources indicated the exchange’s directors will meet as soon as Monday. There’s no telling what will come out of any CBOT board meeting. But sources indicated that hard-liners will push for a vote to begin legal proceedings against the options exchange.
This would be a monumental mistake, of course, for the exchanges and for Chicago. But if past conduct is prologue, the worst will probably happen.
Too often, the exchanges take the road less-profitably traveled.
Instead of focusing on the threats from industry consolidation and computerization, the two exchanges are girding for a family feud. Members don’t seem to care that jobs are at stake, more than 150,000 in Chicago that depend directly on the exchanges. The city’s prestige as a financial center is on the line, too.
There’s plenty at stake, but not much to fight about.
When the CBOT created the CBOE in the 1970s, Board of Trade members got rights to trade on the options exchange. Now the CBOE claims it can nullify those rights if the Board of Trade converts to a for-profit exchange. The CBOT is threatening to sue to prevent that.
There can’t be more than $100 million in trading rights at issue–the difference between the relative value of memberships for the 742 CBOT members who have converted to the CBOE. And yet this relatively tiny sum could bollix up two exchanges with billions in potential market value, should they convert to shareholder-owned entities.
If the Board of Trade asked a judge to block the CBOE from revoking CBOT members’ trading rights, here’s what would happen.
First, the CBOT would get thrown out of court. The exchange has no right to stand before a judge, because nothing harmful has happened yet.
The CBOT’s board and membership have yet to vote on a formal proposal to convert its ownership structure. Until then, the CBOE can’t possibly act on its threat to take away trading rights.
Second, getting legal would kill any merger prospects.
The Board of Trade and Chicago Mercantile Exchange couldn’t agree even to merge their back-office functions. And all that stood between them was their overly large egos.
Imagine returning from a courtroom fight and then trying to merge. Both the CBOT and the options exchange would never let it happen.
The key player in this ridiculous drama is CBOT Chairman David Brennan. After stumbling out of the gate, Brennan earlier this year put out a reasonable proposal to transform the CBOT into a shareholder organization and spin off an electronic exchange.
Now he is putting his program and the exchange’s future at risk by filling his communication with Brodsky with empty threats and arbitrary deadlines. Prospects for a deal could die as a result.
Lots of people cry at weddings.
If blustering and miscalculation kill off this possible merger, then all of Chicago will have plenty to cry about.
