Mega merger a trend setter for further alliances

1. Spectacular rise of the derivatives

We live in an age in which change is a constant. Success lies in the ability to capture the opportunities created by change.

Today’s electronic and information age increasingly creates more options and opportunities. And money, as we know is rapidly evolving into various measurement systems.

The amalgamation of the two longtime competitors, the Chicago Mercantile Exchange and the Chicago Board of Trade, will create the largest derivative market in the world. The new exchange to be named CME Group, will have an average daily turnover of about 9 million contracts representing a staggering $4.2 trillion. This mega merger is expected to limit the scope for market fragmentation in the long term.

Derivative trading is big business. The business of executing investors buy and sell orders is changing rapidly as markets go global. Therefore the derivative exchanges should :

• Create greater efficiency and more liquid markets where buyers and sellers more easily find what they want for the right price.
• Increase focus on electronic trading and the merged exchanges should make the markets more transparent.
• Have cheaper transaction costs
• And least credit risk.

Technology has lowered the barrier for new entrants into the exchange based markets. Derivative exchanges need to improve services and lower transaction costs to expand turnover. A few strategies are discussed below :

1. Strong product branding and provision of real-time price information to retail investors supported by strong marketing.
2. Technology and remote access are key factors in attracting wholesale market participants.
3. Derivative brokers demand 24 hour execution capability, therefore increasingly engage in global alliances to provide continuous trading.

Further global consolidation of the industry driven by economies of scale is expected. Growth prospects are affected by demographics and a positive attitude towards online services. A trend that is catching on is derivative exchanges want to trade in stocks and stock markets want to trade in derivatives.

A large hybrid exchange will promote accumulation of capital and enable savings to be channelled into the corporate sector more efficiently, giving rise to higher levels of economic growth.