(Bloomberg) -- It’s a Terry Duffy classic. After years of expanding CME Group Inc (NASDAQ:CME).’s empire through deal-making, the CEO of the world’s largest derivatives market is at it again. In a major merger with Michael Spencer’s NEX Group Plc, Duffy has cemented his place at the very center of the global bond market.
The deal, which values London-based NEX at 3.9 billion pounds ($5.5 billion), will combine CME’s dominant market for Treasury futures with NEX’s electronic BrokerTec platform, the largest market for trading cash Treasuries. The tie-up could cut costs for customers that trade both Treasuries and derivatives based on them.
“We’re complementary in nature,” Duffy, 59, said on Bloomberg TV.
Duffy’s story is oft-told, like a bedtime story for traders. A native of Chicago’s South Side, he broke out of a neighborhood where he’s said everyone was either a fireman or a cop, knowing he wanted to do something different.
In the 1980s, Duffy was tending bar and going to school at the University of Wisconsin-Whitewater, when he met a trader called Vincent Schreiber. In Duffy, Schreiber saw a go-getter, and suggested he try his hand at what was then called the Chicago Merc. Duffy’s mother and father mortgaged their house to stake him.
Guaranteed Losses
Duffy lost all the money, some $100,000. But he traded his way back, and then some. When he told Schreiber he was done trading, his friend told him he was crazy. He guaranteed Duffy’s losses and told him to keep trading, advice he took to heart.
“I started as a runner on the exchange, and I was tending bar, and met a gentleman who thought I would be good in the business,” Duffy said. “I was making $56 a week. And I never left.”
Since taking the helm at CME in 2002, Duffy has aggressively built the business through big mergers. He bought the New York Mercantile Exchange for almost $10 billion in 2008, two years after taking over the Chicago Board of Trade for another $9.5 billion. The NEX acquisition has the potential to seal CME’s place in yet another trading domain, the electronic market for Treasuries. The deal is expected to close in the second half of the year.
“The depth and resource the CME brings to the equation will allow the cash business to flourish even more than it has,” said Anthony Perrotta, former CEO of research firm Tabb Group LLC.
Big Personality
Combining with NEX will bring another big personality to CME, as Spencer, 62, will join CME’s board once the deal completes. A lover of French wine and rugby, Spencer has a fortune of about 1.03 billion pounds. He will act as an ambassador for the combined company in its dealings with clients, regulators and officials in Europe and Asia.
The expansion of the trading mammoth is not without risk, which any near-monopoly market can face.
“Man, that’s a lot of power the CME now has in the U.S. Treasury market,” said Jim Greco, who co-founded the former Treasuries trading platform Direct Match Holdings Inc. “You have to be a little worried about the pricing power of the CME in the most critical asset class in the world.”
Bond traders have reason to cheer the deal. NEX, also known by its old name ICAP (LON:NXGN), comes to the table with about 80 percent of trading volumes between dealers in the $14.7 trillion market for cash Treasuries. CME is the main destination for Treasury futures trading. Instead of coughing up margins to trade in two places as they do now, customers of cash Treasuries and futures could potentially save costs by having the complementary products under the roof of one combined powerhouse.
“In its essence the consolidation of some of these business and the centralization of them to a single clearer makes sense,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “There is the economies of scale to be taken advantage of and collateral and posting type issues that will be easier to manage.”