CHICAGO - If the Chicago Board of Trade and the Chicago Mercantile Exchange decide to merge, institutional investors could gain in lower trading costs.
But how much could be gained by money managers and pension funds is not clear, largely because it is the exchanges themselves and futures dealers, called futures commission merchants, that would gain the most directly.
Institutional investors stand to gain only the amount of savings passed on to them following any consolidation among the two.
In addition, past attempts at cooperation between the two have failed. Nonetheless, the two exchanges formed a committee in late January to look at possible common initiatives, including a possible merger, following a CBOT internal study that indicates a merger would save millions.
CBOT offerings include U.S. Treasury bond futures and options contracts, while the CME's offerings include futures on the Standard & Poor's 500 Index, Eurodollar deposits and various currencies.
Both exchanges experienced a significant drop in volume last year, as did the futures industry as a whole.
Industry participants see some advantages to a merger.
William Miller, chairman of the End Users of Derivatives Association, and director-asset mix management for General Motors Investment Management Corp., New York, said institutions may see some indirect benefits passed on from lower overhead.
But, institutions also would have much to gain if a merger resulted in end users gaining more say in how the exchanges are run.
He said end users, such as money managers and pension funds, have one of the largest stakes in the exchanges, coming in the form of margin. (Margin is the amount of cash or U.S. Treasury bills posted to cover any losses on futures transactions).
Mr. Miller said derivatives are an integral part of risk management, and "it's important to the end user that the two exchanges remain viable." He said he has "a very positive view of the exchanges," and it's important their integrity be maintained.
He said a counter to the positives of a merger, though, would be a possible loss of competition.
But Todd E. Petzel, an executive vice president for the CME, said the two exchanges are competing with exchanges in the rest of the world, as well as each other. (Mr. Petzel is leaving the CME to become chief investment officer for The Common Fund, Westport, Conn.)
He said exchanges in London, Paris and the rest of the world wouldn't allow a merged entity to become complacent.
Some investors that use futures or options aren't necessarily longing for a change.
"We're pretty neutral on the whole thing," said Ross Waller, director of trading for The Bridgewater Group, a money manager in Wilton, Conn. Mr. Waller said the effects of a merger will be buffered by the fact that he deals with a futures commission merchant, and costs are negotiated at that level.
Mr. Waller said there are a few relatively minor things the CME does that he'd like the CBOT to adopt, but that could happen without a merger.
Stephen Manus, president of ANB Investment Management, Chicago, said he doesn't see any negatives coming from a merger, and it's too early to say if there would be any benefits.
Others do see some clear benefits. Virginia France, assistant professor in the finance department at the University of Illinois, Urbana, who has researched futures exchanges, said "it makes a lot of sense" for the CBOT and the CME to at least merge their clearing functions. Costs could be lowered and trading would be easier, she said. The exact size of the economies of scale to be gained isn't clear, though, she said.
She noted previous attempts at cooperation between the two exchanges have failed, notably GLOBEX, an after-hours electronic trading system. The Board of Trade dropped out of the GLOBEX partnership in 1994.
Alexander Lamb, general manager in the Chicago office of FIMAT Futures USA Inc., a futures commission merchant, said a merger "can only be good for the end user. It can only serve to reduce costs."
Historically, the Chicago exchanges have been driven by the needs of their members more than its customers, he said. For example, he said the United States is one of the few places where members pay higher fees than non-members. Cutting costs through a merger would lead to reduced costs for the exchanges' customers, he said.
Currently, it's more expensive to do futures business in Chicago than it is at the London International Financial Futures and Options Exchange or the Marche a Terme International de France in Paris, he said.
Referring to a merger of two huge exchanges, with different cultures and history, Mr. Lamb said: "I think it can be done. We want to keep the exchanges here alive and well."