Brazil exchange operator beefing up with CME stake

February 12, 2010

BM&FBovespa, the world’s third-largest exchange operator by market value, aims to raise its stake in CME Group to 5 percent, making it among the top three shareholders in the fast-moving market maker. Given Brazil’s huge presence in global commodities markets, it’s not hard to see why the country’s main exchange would want to increase its exposure to the top U.S. commodities trading entity. BM&FBovespa said it will invest $175 million over 10 years in a new trading platform with CME. But shares in CME, the world’s largest exchange operator by market cap, fell in early trading, although they later recovered to rise moderately. Hardly the reaction one would expect on news that a hungry, strategic buyer is more than doubling its stake.

It is possible regulatory concerns weighed on the stock. Cross border mergers that include potential technology transfer are natural fodder for antitrust boffins. But Bovespa is likely in for the long haul, as it has more to gain from taking a position in CME than the other biggest shareholders, Blackrock and Fidelity.

As far as the timing goes, CME which already has a 5 percent stake in BM&FBovespa, said only a couple days ago it would buy the bulk of Dow Indexes, showing it is not afraid of moving on big-name deals. The stock is nearly 20 percent down from a year high hit in early January, possibly underscoring the case for Bovespa to move at bargain prices.

The companies also agreed to develop new technologies for high-speed trading platforms for stocks, derivatives, currencies, and government and corporate bonds. What exactly Brazil brings to the development table is not immediately clear. More likely, it hopes to leverage big bags of commodities trading. It has seen a boom in trading volumes since it began offering in August 2008 direct market access for investors looking to implement algorithmic and high-frequency strategies. So for Bovespa, as well as its trading clients, timing is everything.

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