CME Sparks Exchange Fever

The merger of two big Chicago futures exchanges sent ripples through the exchange sector on Tuesday, as investors applauded the deal and wondered about further consolidation.

The Chicago Mercantile Exchange(CME Quote) plans to purchase CBOT Holdings(BOT Quote), parent company of the Chicago Board of Trade, for $8 billion.

The deal will create CME Group, a trading powerhouse for derivatives and future contracts, valued at $25 billion, with an average daily trading volume of about 9 million contracts a day. But the deal also places increasing pressure on other exchanges to evaluate their competitive positions once the CME and CBOT combine. That fueled a rally in most exchange stocks today.

One market participant, who didn't want to be identified, noted that: "Violent reaction higher can't help but reinforce the idea among management teams at other exchanges that consolidation is good."

Not surprisingly, the big gainer on the day was CBOT, which rose $16.75, or 12.5%, to $151.26. Shares of the CME also surged, rising $8.30, or 8%, to $511.55. Investors clearly are betting the combination will further solidify the CME's destination as the premier exchange for derivatives and futures trading.

A derivative is a sophisticated financial instrument that derives its value from an underlying stock, bond or other security. Some of the innovative derivatives traded on the CME and the CBOT include futures contracts based on the interest rate yield curve, equity indices, foreign exchanges, agricultural and industrial commodities, energy and weather predictions.