ICE Lands Russell Contract, Possible Leg Up In CBOT Bidding War

The Intercontinental Exchange (ICE) stuck its thumb in the eye of the Chicago Mercantile Exchange (CME) this morning, announcing a deal for the exclusive rights to trade futures and options on futures on the full suite of Russell indexes.

Those contracts currently trade in large volumes on the CME, to the tune of 200,000+ contracts per day. Now, assuming the FTC doesn’t intervene, all that volume will move to ICE.

Here are a few thoughts on the deal:

1) The fact that this comes amidst the acrimonious ICE/CME bidding war over the CBOT (BOT) is no accident. CME has tried to position ICE as too small to handle a CBOT acquisition. This deal certainly makes ICE look like a major player in the market, and could catch the eye of CBOT members.

2) The deal bucks a broader trend in the index industry towards open, non-exclusive derivative contracts. Although terms of the deal were not reported, you have to imagine that ICE gave Russell a pretty good deal to win this mandate. The risk to Russell is that traders may prefer futures that trade on multiple exchanges --- we’ve seen huge growth in options that go “open source” and “multiple market” --- and ICE will have to work hard to sustain and grow volume in the contracts.

This deal shows that ICE is expanding beyond its roots in energy into other areas of the market, and I imagine they’ll build out their index options market further in the near future.

Comments

[add_trader:]

During the Q&A session today at the Growth Stock conference, Sprecher was asked about the deal they made with Russell. He indicated that it was not so much that they gave Russell a better financial deal, but that Russell was on board with ICE's ability to dramatically improve volumes and better brand the Russell products. The terms will be released soon. Sprecher said that the Russell contract volume had been growing by 30% annually, but he felt ICE could increase that yearly volume even more. More volume means more revenue for Russell even if the licensing rates did change.

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2007 Jun 19 11:23 PM

[add_trader:]

Sorry...."even if the licensing rates did NOT change."

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2007 Jun 19 11:25 PM

[Zachary Sch...:]

ICE has been working very hard to convince BOT to view it as a strong player in the derivatives markets. While I think CME will eventually win the bidding war, this contracts continues to cement ICE's position as a strong stand alone company as well as an attractive takeover candidate

2007 Jun 20 10:39 AM