This week I saw a story about how a college intern at Lehman Brothers in 2006 was trading a $150 million proprietary trading book for the firm. It was a revealing anecdote about the nature of risk management at the time from a recently released book by former Lehman prop trader Lawrence McDonald.
Russian military operations in Georgia are winding down, but tensions between former CBOT members and the Chicago Board Option Exchange (CBOE) over exchange right privileges (ERP) remain unresolved.
This morning in a CBOE members’ circular, CBOE’s office of the chairman issued a statement that while progress has been made, the agreement, which was to give former CBOT member an 18% equity stake in the options exchange and a cash payment of $300 million to end all claims, had not been finalized.
Word is that the agreement is still being held up by infighting amongst CBOT members over the number of people who will qualify for the settlement. The fewer who qualify, the larger the individual payouts would be. The CBOE has the right to walk away from any agreement that does not extinguish equity claims by all former CBOT members.
More to come….
Timing is everything, and today the Chicago Board Options Exchange (CBOE) found itself with a room full of journalists the day before what could prove to be a fateful moment in the future of the exchange. On Wednesday morning, the Securities and Exchange Commission (SEC) is expected to act on CBOE’s proposed rule change that would eliminate former Chicago Board of Trade (CBOT) member’s CBOE exercise rights, an issue that has been hotly contested for years and could be worth millions to everyone involved.
In December 2006 the CBOE board announced the rule filing, stating, “upon completion of CME Holdings’ acquisition of CBOT, CBOT members no longer would qualify to become or remain members of the CBOE through the exercise right.”
William Brodsky, chairman and CEO of the CBOE, said that the decision could be “the second to last stop,” on the road to demutualization of the exchange. Final decisions and details will be the responsibility of the Delaware court, where CBOT members have filed suit against the CBOE on the equity issue. The Delaware court has postponed the case until the SEC announced its decision on the rules change.
Up until crude oil hit $90 per barrel, ethanol had seen some hard times, trading down to around $1.50 per gallon, which is near or below the break-even point for producers.
The issue has largely been one of over supply. The U.S. government has mandated very aggressive goals for ethanol production, including a subsidy of more than 51¢ per gallon to fuel producers who mix ethanol with gasoline. And producers responded strongly, there are projections that 2012 production goals will be met in 2008; but that over supply has hit producers where it hurts: in the profit margin. For example, On Monday, the Denver Post reported that Denver based Bio Fuel Energy Corp. has delayed plans to build more ethanol plants until prices come up.
Back in December I wrote a story about the four grain exchanges and the liquidity that was pouring into them as they went electronic on the Chicago Board of Trade’s e-CBOT trading platform and began offering side by side trading (see “Trade locally, think globally,” December 2006, page 52). The idea behind that story was that with exchange consolidation fever in the air, the regional grain exchanges just might be tasty targets for acquisition.
Since then, the CBOT merged with the Chicago Mercantile Exchange, and the Intercontinental Exchange (ICE) made an offer for the Winnipeg Commodity Exchange (WCE); the latest news is that a competitive unsolicited bid of CAN $50 million, or $77.59 per share, has been made for the WCE by an unnamed third party. That exceeds the CAN $40 million, or $62.08 per share that ICE bid.
Two down and two to go. But what about the Minneapolis Grain Exchange (MGEX) and the Kansas City Board of Trade?
Since December, the price of a membership at the Minneapolis Grain Exchange has increased to $170,000 from $65,000, and the exchange, which owns its own clearing operation, trades hard red spring wheat and five financially settled index contracts, has logged record trading volumes in three of the last six months, both in pit trading and electronic trading. But the exchange is still a mutual organization, making it an unlikely target for acquisition due to the lack of common currency.
Meanwhile at the Kansas City Board of Trade (KCBT), the home of the hard red winter wheat contract, the last membership traded hands in April for $465,000, up from $300,000 in December. Jeffrey C. Borchardt, president of the KCBT, says that the exchange converted to a Delaware for-profit corporation in 1973, not for the purposes of merger and acquisition, he says, but to unlock the value for members in the form of dividends, which the company has paid for each of the last nine years.
So what’s keeping them from being assimilated?
“There is nothing keeping us from doing that. It’s all a matter of interest and strategy,” Borchardt says. “The trend will continue, and at some point in time we may have to consider whether that is in the best interest of our members and customers to get involved with something like that, either on the buying or the selling end.”
Now don’t get the wrong idea. Borchardt DID NOT cop to anything in the works. In fact he wouldn’t even deny that the KCBT hadn’t made the offer for the WCE, (how’s that for canny?) But with 50% increase in seat prices over the last seven months, wheat prices as high as they are, and the issue of e-CBOT going away in the next 12 to 18 months, nothing would surprise me.
