Tuesday, April 5, 2011

Zero-Sum Game

I read an excellent book recently, which has taken on an almost eerie relevance right now: Zero-Sum Game: The Rise of the World's Largest Derivatives Exchange, by Erika S. Olson. It's a blow-by-blow account of the (really very dramatic) 2007 merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). Olson was in the perfect position to write the book — she was a Managing Director at CBOT at the time, so was sufficiently senior that she was very close to, if not directly involved in, the behind-the-scenes action; but she had also just taken the job, so she wasn't too emotionally attached to the CBOT to give an accurate account.

Olson is clearly a very talented writer too: the book was a terrifically enjoyable read, which was something of a surprise. I easily read the entire book on a round-trip domestic flight, and I'm not an abnormally fast reader (one of the drawbacks of compulsively reading every single footnote/endnote in every book I read).

Of course, the story is dramatic in itself — CME and CBOT were longtime and extremely bitter rivals to begin with, and then IntercontinentalExchange (ICE) came in with a surprise hostile bid for CBOT, a bidding war ensued, etc., etc.

The story is eerily similar to the bidding war that's going on right now for NYSE Euronext. First, Deutsche Börse and NYSE announced that they had agreed to a $10.2bn merger, and then last week Nasdaq and ICE (again!) came in with a hostile competing bid for NYSE that totaled $11.3bn. And that's where we stand right now: with all eyes on NYSE's board of directors, as it weighs the competing bids. Both bids would raise significant antitrust issues — which CME and CBOT went through in 2007 as well — so the Department of Justice is waiting in the wings. Really, it's almost hard to describe how much the current NYSE bidding war is a replay of the CME/CBOT merger.

The entire exchange world is going through a serious round of Merger Mania right now, so Zero-Sum Game almost couldn't be more relevant.

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