Leaders of Chicago’s often contentious and highly competitive futures exchanges over the years have pulled few punches in trying to gain an edge either in trading or public opinion.
Yet when it comes to their own industry’s future–especially here in Chicago–they stand shoulder-to-shoulder in a couple of steadfast beliefs:
– That the ancient trading system of human beings standing in a pit and shouting bids and offers to one another, or “open outcry,” won’t be made obsolete soon by traders hitting computer keys at opposite ends of the earth.
– That chances are slim the world’s premier futures exchanges–the Chicago Board of Trade and the Chicago Mercantile Exchange–will follow the example of commodity markets in New York and London by merging.
At least not anytime soon.
The exchanges nevertheless face growing pressures, particularly from large member firms, to reduce costs by at least combining similar functions. They also are facing a challenge from world futures markets that increasingly rely on computer trading.
“When you compete as aggressively as they have for at least 20 years, it is very difficult to put your arms around each other’s shoulders and say let’s be buddies,” said Clark Heston, executive director of the financial markets and trading program at the Stuart School of Business, Illinois Institute of Technology.
Heston, who is coordinating a new study of Chicago’s financial industry sponsored by the Civic Committee of the Commercial Club of Chicago, only half jokingly says the CBOT and Merc will merge in the spring of 2028.
Leo Melamed, chairman emeritus of the Merc and chairman of Sakura Dellsher Inc., thinks the exchanges have missed the boat on the technological changes that put the viability of open outcry into question.
“The growth of screen-based technology must be addressed,” he said. “Globex had potential as an electronic hedge, but hasn’t been sufficiently developed.”
Globex is an electronic system that, among other things, trades Merc products during hours the exchange isn’t open.
It was developed by the Merc in conjunction with the French futures exchange MATIF and Reuters, the British financial information services firm. The three are now negotiating a new agreement on Globex to replace the current pact, which terminates in April.
While electronic trading systems come into play, they probably won’t have a significant role in Chicago for 20 or 25 years, according to Patrick Arbor, chairman of the CBOT.
He acknowledged that many of the new futures springing up worldwide have adopted computer trading systems. But they have done so, Arbor said, because they lacked the time to develop local traders who make for the depth of markets in Chicago.
“We grow locals in Chicago like the Swiss grow bankers, the Italians grow designers and the British grow writers,” he said. “It takes a long time–we breed them.”
Chicago traders benefit from the tradition they inherit and the culture that can’t be duplicated, agreed CBOT President Thomas Donovan.
“The technology of these electronic systems cannot compete with open outcry, the immediacy, the vibrancy that we have on our floor.”
John F. Sandner, chairman of the Merc, said open outcry produces bids and offers that are the tightest because of the liquidity in the pit.
“Technology and cyberspace have a wonderful potential to embellish the open outcry, but will never replace it,” he said.
“Many people had expected open outcry to go by the board a long time ago, but it doesn’t seem to know it’s supposed to die,” said Leslie Rosenthal, a former chairman of the CBOT and managing partner of Rosenthal Collins Group.
“Probably we will continue this type of methodology, in Chicago at least, for some time to come,” he said.
As a small trader in the wheat pit at the CBOT, Pat Hillegass views the pluses of open outcry as liquidity to the users and the flow of information as to who is doing what to the floor trader.
“If I know the commercials are buying a lot lately, there’s probably some export business and it is probably a spot that I might want to take a shot at buying,” he said. “If you lose that flow of information, you’ll probably lose liquidity in the market.”
As to whether the two exchanges would ever combine, Rosenthal says only a financial crisis serious enough to threaten them with going out of business would lead to a merger.
“Short of that, I don’t think you’re ever going to have a merger because you always have a fear by both parties as who is going to emerge as top dog,” he said.
“They really do have a very different set of products, a very different kind of staff, a very different kind of membership,” Heston said. “I’ve just described two different cultures. To say, `come on guys, get together,’ that’s not going to happen in the foreseeable future and it is not going to happen easily.”
He believes that a merger will come in incremental stages, combining areas such as clearing where it is economically efficient. It also might make good sense, he said, for the markets to combine their education and marketing efforts.
“They could . . . sell a Chicago presence to the world,” he said.
Heston thinks that Merc and CBOT will remain independent exchanges “because their role in the economy and their client base is very different. But it is possible for two different cultures to work together for their mutual benefit.”
Arbor said the answer is probably yes to a merger in the long term–over the next 25 or 30 years.
“We have a great commonality of membership,” he said. “Most of our firms are members of both exchanges. It is probably logical that the relentless push to reduce costs down the road would drive the two of us together.”
At the Merc, Sandner argues that many things could be done to benefit members without actually merging the exchanges, and not to do something just because it looks good on paper.
“I’ve come up with a paradigm of collaboration and doing things in which we have a commonality of interests in terms of processing, banking relationships and settlement that benefit the clearing members of our institutions,” he said.
Over the next few years, Sandner sees an environment conducive to cooperation but not specifically a formal merger.
“The clearing functions could come together in terms of processing, but whether there is one major clearing entity, that’s another question,” he said. “We have different setups and the jury is still out on what benefits there would be.”
Donovan points to the issue of cost savings to the industry.
“Our perspective has been that one clearing entity will reduce the cost of business, technology, staffing. That is going to make for a more profitable futures industry and bring more orders to the floor of the CBOT. The dollars and cents of the issue will guarantee that it will be revisited.”
The merger idea has kicked around for years, but few have saluted. Rosenthal recalled that he and Melamed worked behind the scenes on a possible merger in 1981 and 1982.
“I gave up on it because we could never get anyone else to join,” he said. “The crowd was two–Leo and I. No one else came to the party.”
MEMBERSHIP PRICES GROW MORE EXCLUSIVE
Back in 1972 an aspiring trader at the dawning of the age of financial futures needed to pony up only $10,000 to become a member of the new currency futures trading division of the Chicago Mercantile Exchange, the International Monetary Market. That same year, the top price paid for a full Merc membership was $100,000.
Seat prices fluctuated as the years passed, depending on trading volume and market conditions, but generally advanced and topped out in the roaring markets of 1994, propelled by the prospects of higher interest rates–$850,000 for the IMM and $925,000 for full membership.
As volume declined this year, particularly in currency futures which face stiff competition from computerized trading between large banks, so did seat prices, prompting some membership discontent. The high price for a full Merc seat in 1995 was $822,500. It fell to $506,000 on Dec. 6 and recovered to $575,000 at the last reported sale on Dec. 13. That would have been the high price for any year before 1992.
A similar pattern, though less volatile, has been evident at the Chicago Board of Trade, where it must be kept in mind there are 1,402 full memberships compared with 625 at the Merc.
While a full membership, which carries with it the right to trade at the Chicago Board Options Exchange, went for between $77,000 and $125,000 only 20 years ago at the CBOT, in January 1995 it hit a record $710,000 before dropping to $525,000.
The last CBOT seat sale, posted on Dec. 1, was for $531,000. Last week, bids were quoted at $530,000 while the asking price was $625,000.
