Skip to main content

CBOT/CME Merger: An Arithmetical Subplot

I've been thinking again, for no very compelling reason, about the merger of the two great Chicago exchanges in 2007. In form, it was an acquisition of the Chicago Board of Trade by the Chicago Mercantile Exchange, after the CME won a bidding war with the Intercontinental Exchange (ICE),

I'm looking at Erika Olson's book about the behind-the-scenes maneuvering that ended in that result. One of the many subplots involves ERPs, the "exercise right privileges" possessed by many CBOT members with regard to yet another Chicago institution, the Chicago Board Options Exchange.
This takes some explaining. First, neither the CBOT nor the CBOE is a mere set of initials. Each is a true acronym, "see-bot" and "see-bow" respectively. Second, the CBOE, established in 1973, does what the name implies. It provides a forum for the trade in options. It was initially a spin-off from the CBOT, and they had a close continuing relationship. One part of that: everyone with at least 27,338 shares in the CBOT had the privilege of trading on the CBOE, an ERP.

Once a CME bid was announced, even before ICE became involved, the question arose: what happens to the ERPs?

The CEO of CBOT, Bernie Dan, was all in favor of the deal with CME. At one critical meeting, he explained to the members that every share of their equity in the exchange was going to be worth .3006 shares (that is, a little less than one third of a share) of the new entity, called The CME Group. So: how many shares of The CME Group would one need to qualify for an ERP? That is a straightforward mathematical question, what is .3006 of 27,338?

Well, straightforward in that one can easily enter it into a calculator. Personally I wouldn't want to try to do that in my head: !

Apparently, at the meeting when Dan announced the .3006-to-1 ratio, one of the members/traders did try to do it in his head.

As Olson writes, he "attempted to figure the numbers out loud and got it totally wrong." She gives the impression that she's doing him a solid by not naming him and subjecting him to innumeracy-shaming. "I heard other traders grumble in disapproval of the colleague's inability ... 'This is fucking embarrassing."

Really? Whoever he is, he need fear no disapproval from me. I admire anyone who would TRY to do that off the cuff sans calculator.

The answer, by the way, is that 8,217.8028 shares of CME stock were necessary to keep an ERP in the CBOE.

But I bet my bright readers have already figured that out.
Labels:

Comments

Post a Comment

Popular posts from this blog

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.   We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a maj...
9 comments
Read more

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere.  At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak...
17 comments
Read more

Recent Controversies Involving Nassim Taleb, Part I

I've written about Nassim Taleb on earlier occasions in this blog. I'll let you do the search yourself, dear reader, for the full background. The short answer to the question "who is Taleb?" is this: he is a 57 year old man born in Lebanon, educated in France, who has been both a hedge fund manager and a derivatives trader. He retired from active participation from the financial world sometime between 2004 and 2006, and has been a full-time writer and provocateur ever since. Taleb's writings for the general public began where one might expect -- in the field where he had made his money -- and he explained certain financial issues to a broad audiences in a very dramatic non-technical way. Since then, he has widened has fields of study, writing about just about everything, applying the intellectual tools he honed in that earlier work. As you might have gather from the above, I respect Taleb, though I have sometimes been critical of him when my own writing ab...
4 comments
Read more