DealZone

Goldman to join the electronic attack on CME?

March 6, 2008

Big mergers among security exchanges could send banks scrambling to make deals of their own.

Goldman Sachs might be the latest member to join a group of 12 companies looking to mount an electronic attack against the Chicago Mercantile Exchange.

Big banks such as Merrill Lynch, JP Morgan, Barclays, and Deutsche Bank have already banded together to create an electronic platform that could help crack the near monopoly that the CME holds over the U.S. futures market.

The development of a new electronic futures platform comes at a time when the CME Group is likely to merge with the New York Mercantile Exchange and its lucrative metals and energy business, creating an even more dominant marketplace.

Goldman is no stranger to electronic exchanges. The firm was a key player in the development of Archipelago, an electronic exchange created to compete with the NYSE and NASDAQ. The two rivals partnered up in 2006 when then NYSE Chairman – and former Goldman executive – John Thain merged the NYSE with the ailing electronic trading platform.

The new electronic platform, unofficially known as Four Seasons, could challenge the stranglehold that the CME Group currently enjoys on derivative trading. A new electronic competitor could drain volume – and commissions – away from the exchange. To make matters worse, many of the CME’s largest clients are the same banks throwing capital at the Four Seasons project.

These banks that once drove volume to the CME may now steer trades to their own electronic system. By trading on the Four Seasons platform, banks would not only receive cheaper executions, but also pile volume onto a system they have a financial stake in.

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