Streetwise Professor

March 17, 2007

Further Thought on ICE-CBT

Filed under: Derivatives,Energy,Exchanges — The Professor @ 1:17 am

One article about the ICE initiative suggests the possibility of a three way–CME+CBT+ICE. This is an intriguing possibility. As I noted in the previous post, the benefits of an ICE-CBT combination are underwhelming, but adding ICE to the CME-CBT combo would add additional savings to the already large benefits of the latter combination.

If this does happen, NYMEX would be in a very tenuous situation. I have been somewhat skeptical of NYMEX’s strategic situation. In particular, NYMEX does not own its technology. Pushed by ICE, it ran into the arms of the CME. The move to Globex turned out to be a win-win for the two Mercs. But if the CME combines with ICE, NYMEX is in a world of hurt. I doubt it would be feasible (especially given its technology track record) to build a credible electronic platform on the fly, and would have to partner up with another exchange (e.g., Eurex or EuroNext), and right quick too. Its negotiating position would be pretty weak, although it could potentially play Eurex off against EuroNext/NYSE.

It’s hard to figure out what the market thinks of this possibility. Even before this all hit, I thought NYMEX was overvalued, but its stock went up 8 percent on the ICE announcement, and has held onto most of that gain. In contrast, ICE stock jumped up on the news, and then went down by almost the same amount by the end of the day. Indeed, it is now trading below the pre-announcement price. (CBT stock is above the pre-announcement level, but off its high.) I conclude that the market’s collective judgment is either that an ICE-CME tie up is unlikely, or that if successful this would make NYMEX a takeover candidate. Expanding on the first alternative, NYMEX’s strong stock price performance could suggest a market view that however things work out, the ICE endeavor divert its management’s attention and resources away from energy, thereby taking some of the heat off NYMEX. It is ironic, however, that the stock of a seeming bystander has done so well as a result of ICE’s move.

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