CME Group Inc on Wednesday agreed to buy the Kansas City Board of Trade for $126 million in cash, cementing CME's dominance in world grain futures markets and keeping rival IntercontinentalExchange from gaining a key foothold.
It is CME's first exchange purchase in five years since it wrapped up a buying spree that put the Chicago Mercantile Exchange, the Chicago Board of Trade and the energy-focused New York Mercantile Exchange all under its control.
It comes as the Chicago-based giant faces one of the biggest challenges yet to its benchmark wheat, soybean and corn contracts: ICE's renewed efforts to build up its agricultural markets business, including the launch this year of look-alike U.S. grain futures that opened a new front in the decade-long battle for commodity derivatives dominance.
So far, the copycat contracts of ICE's electronic exchange have garnered little volume. But CME has responded swiftly to protect its lucrative grains franchise, a mainstay of global markets for decades, expanding trading hours to keep step with ICE in a move some floor traders have protested.
"The CME is taking an aggressive stance to firmly establish itself as the world leader in exchange-traded products, so this isn't a surprise," said Ken Smithmier, market analyst for The Hightower Report, a Chicago-based research and advisory firm.
CME beat out several rivals before clinching the deal, KCBT President Jeff Borchardt told reporters on a conference call. He did not name the other bidders.
News of the acquisition sparked speculation that the Minneapolis Grain Exchange - an independently owned market that hosts the third of the three major U.S. wheat futures contracts - could now be in line for a bid from ICE.
"I thought Minneapolis would be the first to be gobbled up," said Smithmier.
An ICE spokeswoman declined to comment on whether it had been in talks with KCBT or was in talks to buy the Minneapolis Grain Exchange.
In 2007, ICE lost out to CME in a bidding war for the CBOT.
The deal will bolster volume in both CME's and KCBT's wheat contracts and provide new trading opportunities, CME's Duffy said. Soon to be added are options on spreads between the two contracts, CME's top commodities executive told reporters.
MINNEAPOLIS IN FOCUS
Kansas City's wheat contract is for "hard red winter" wheat, a variety that is grown on twice as much U.S. farmland as Chicago's "soft red winter" brand - but which has long lagged behind its more liquid rival in terms of volume.
In September, CBOT wheat volume rose 5 percent from last year to some 1.5 million contracts, while KCBT's turnover fell more than 30 percent to under 290,000 lots. Current open interest in CBOT wheat is 462,288 contracts, nearly three times as big as KCBT wheat's open interest of 158,180 contracts.
The Minneapolis futures contract is based on a third variety, spring wheat, that is also a major North American crop - but futures trading is even less active than in Kansas City. Unlike the KCBT or CBOT, MGEX wheat is only traded electronically. Both exchanges already use CME's trading platform.
"MGEX extends our congratulations to both the CME and KCBT on this announcement," a Minneapolis Grain Exchange spokeswoman said, offering no comment on whether MGEX was for sale.
Traders said a deal seemed inevitable.
"You would think that MGEX would look like a ripe target for some type of merger or acquisition, if nothing else because we are essentially a North American spring wheat contract, and the combined North American spring wheat is huge, even bigger than the U.S. hard red winter wheat crop," Austin Damiani, an analyst at Frontier Futures in Minneapolis, said, referring to combined U.S. and Canadian wheat production.
Asked about the possibility of a bid for MGEX, a CME spokesman said: "We remain focused on completing this transaction, as we believe it will create significant value for customers and shareholders of both companies."
The deal is expected to close later this year, subject to approval by KCBT shareholders and regulators.
The KCBT will make a special distribution of excess cash to members when the deal closes, CME said in announcing the deal. A KCBT official declined to give a figure, but said it would be substantial.
CME shares were up 2 cents to $57.53 in late morning Nasdaq trade, with turnover low.
As part of the deal, CME has agreed to keep the Kansas City market's trading floor - now mostly empty during the trading session with most deals conducted electronically - open for at least six months.
CME Executive Chairman Terrence Duffy noted that CME has kept its Chicago trading floor open for much longer than many observers had expected and said there were no set plans to shut the floor if it still provides value.
The trading floor at the KCBT is a fraction of the size of Chicago's. Until just a few years ago it was a buzzing and bustling, packed with frenetic traders who fought their way in and out of the packed circular pit.
Trading floor lore includes the story of an old-time trader who suffered a heart attack in the midst of a particularly busy trading session. He was attended to, but the pit action barely paused as fellow traders took orders out of his pockets and continued shouting and gesticulating to make sure his trades got filled.
A longtime trader who has been trading wheat futures since 1978 said the buyout by CME marks the end of an era.
"The floor used to be vibrant," he said. "Now it is nothing in terms of volume. That is a sad thing to me. I'm not adverse to change. And I do most of my stuff on the screen now anyway. But we've got 156 years of history here. It's sad to lose that."