Chicago exchanges in $25bn merger

Chicago's two historic commodities exchanges are to merge in a $25bn deal that will create the world's biggest market for derivatives, trading contracts worth more than $4trillion every single day.

In the most dramatic example so far of the consolidation sweeping the global exchanges, the Chicago Mercantile Exchange is paying $8bn for its smaller cross-town sibling, the Chicago Board of Trade.

The pair pioneered financial futures trading in the 1970s and the explosion in such trading in the past decade - particularly because of the rise of hedge funds - has turned them into global powerhouses. The merger brings together the CME's expertise in interest rate, equity and foreign exchange derivatives with the CBOT's strength in interest rate futures and commodities.

"This is a landmark agreement for our companies, our industry and the city of Chicago," said Charlie Carey, the CBOT chairman, who will become vice-chairman of the combined group. "As a single entity, we will be the world's premier financial marketplace in terms of product breadth, global reach and market capitalization and ensure that Chicago remains the center for risk management worldwide."

Both exchanges still operate open outcry trading floors, which will be combined on the CBOT premises. The CBOT's electronic trading, meanwhile, will be switched to the CME's highly successful Globex trading platform.

Craig Donohoe, chief executive of the CME, said he believed increasing competition between global exchanges and other inter-bank dealers would prevent regulators from stepping in to block the deal. "We've been very well advised by the Department of Justice on antitrust issues, and we're not expecting any regulatory issues," he said.

Exchanges around the world are combing, in part to cut costs in response to pressure for lower trading costs. The New York Stock Exchange has agreed a merger with Euronext, owner of the Liffe futures exchange, and the London Stock Exchange is being wooed by Nasdaq.

Yesterday's merger will help the Chicago exchanges compete with Intercontinental Exchange, which owns Europe's biggest energy market and agreed last month to by the New York Board of Trade. Both exchanges have histories stretching back into the 19th century. The CME, affectionately known as the Merc, opened in 1898 as a trading post for butter and eggs, while CBOT's history dates to 1848 and it began exchanging contracts for future delivery of flour, timothy seed and hay.

CBOT demutualised and floated last year, and soaring trading volumes and excitement over industry consolidation have pushed the shares up from an initial $54. The takeover price was set at $151 in CME stock or with a part-cash alternative.

Shares in the CME are at an all-time high in anticipation of an acquisition that will boost the pool of liquidity and the breadth of derivative products that have attracted traders to use the exchange. September was its second busiest month ever, with overall trading up 15 per cent and Globex up 22 per cent on the year before. The company has long expressed an interest in consolidation and has flirted with several other exchanges; recent rumours have linked it the Intercontinental Exchange and Deutsche Börse, as well as CBOT.