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Churning Markets Bring Cheer to the Merc

The futures and options exchange reported record volume amid Tuesday's wild markets -- and investors snapped up its shares Wednesday

Market players flocked to trade $8 trillion of investments on Chicago Mercantile Exchange Holdings' (CME) namesake exchange on Feb. 27. A dizzying 13.7 million futures and options contracts changed hands through computers at the exchange also known as "The Merc," beating the prior record of 11 million contracts on Dec. 1, according to a press release Feb. 28.

As investors dumped stocks around the world and belly-ached about an earlier sell-off in China -- which helped push benchmarks like the Dow Jones industrial average sharply lower on Feb. 27 -- futures and options players piled into the Merc's alternative investments involving bets on all kinds of things such as the future direction of interest rates or commodities.

This isn't the first time the Merc has benefited during a tumult. When Hurricane Katrina swooped in during August, 2005, the storm whirled up markets as well as flood waters in New Orleans. While investors worried about the economy and sold stock, volume at the Merc surged 39.4% in September, 2005, to 5.18 million, Sandler O'Neill analyst Richard Repetto pointed out in a Feb. 28 research note. "Yesterday's volume (from the China scare) could have a similar positive impact," Repetto said. (Sandler O'Neill has done investment banking for the Merc within the past 12 months.)

The Merc could use good news. Before the market downturn on Feb. 27, the exchange's volumes were down and needed an uptick of 22.9% in March to reach Repetto's earlier forecast for the quarter. But now volume only needs to be up 5.6% in March to meet that forecast. Repetto thinks March might even end up being the best month on record for the Merc's volume.

Investors bid up shares in the Merc by 5.5% to $539.15 per share on Feb. 28, as equity markets rebounded.

The Merc's record trading volume came a day after the exchange had announced that the Securities and Exchange Commission has declared effective its registration of an $8 billion merger with the Chicago Board of Trade (BOT). Now the Merc is planning to hold a special shareholder meeting on April 4 in Chicago to seek shareholder approval of the deal. If all goes through as planned, it will cement the Merc's global No. 1 position, in both the average daily value and the number of contracts traded, giving it a commanding lead over Europe's Euronext and Eurex exchanges (see, 10/17/06, "The Merc and the CBOT: Together at Last").)

A merger will be a much nicer way than a market scare for the company to boost its trading volume.

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