Exchange-Traded Exchange: Merc IPO Due Thursday

The big surge in revenue is the result of a huge spike in trading volume on the Merc as recession-wary investors have sought to hedge their bets against changes in interest rates, fluctuations in currency prices and price changes in the stock indices. The Merc, for instance, is one of the world's largest markets for buying and selling eurodollar contracts and futures contracts tied to changes in the value of the S&P 500 or the Nasdaq 100.

But with the Federal Reserve indicating that further interest rate cuts are unlikely, trading activity on the Merc -- especially in futures contracts tied to interest rate changes -- could diminish in the coming year.

Indeed, on that basis, several money managers who invest in financial stocks said they had little interest in Merc IPO. One money manager, who didn't want to be identified, said he's not sold on the concept of buying shares in a publicly traded exchange.

Big Backers

But others say the concerns about the valuation and diminished growth at the Merc are much ado about nothing. Boosters note that the exchange has proven itself to be one of the country's most innovative market trading forums. Indeed, the exchange has come a long way from its early days as a place for Midwest farmers and merchants to buy and sell futures contracts on everything from pork bellies to eggs.

"We happen to love the offering," said David Menlow, president of IPO Financial Network, a market forecasting service. "It's a profitable operation and one of the most innovative exchanges out there in terms of creating products."

Similarly, John Lothian, president of the electronic trading division of the Price Futures Group, a Chicago brokerage firm, said the Merc has an "excellent product mix" and has shown a knack for developing new futures contracts to trade.

There's enough riding on the Merc offering that even critics say there's little reason to believe the IPO won't go forward as planned. The deal is being underwritten and pushed by four big Wall Street firms: Morgan Stanley(MWD Quote), UBS Warburg, J.P. Morgan Chase(JPM Quote) and Citigroup. And Wall Street needs the Merc IPO to go off without a hitch if deal-hungry investment bankers have any hope of persuading the Nasdaq and New York Stock Exchange to go forward with their own embryonic IPO plans.

Also rooting hard for the Merc offering is James McNulty, the exchange's chief executive. If the IPO prices at $32.50, McNulty's basket of stock options will be valued at $38.9 million.

These days, that's a commodity a lot of investors would love to get their hands on.

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