A Battle Royal Is Brewing in Chicago


By Joseph Weber The sharp-elbowed bruisers who shout and scrap in the famed pits at Chicago's Board of Trade and the Chicago Mercantile Exchange rarely shrink from a fight. In annual charity events, some of them literally put on boxing gloves and pummel each other to raise thousands of dollars for troubled kids. But in the global battle that these traders will soon face -- a brawl with the powerful Eurex derivatives exchange -- brawn and chutzpah won't trump brainpower. Indeed, the forthcoming set-to will determine whether Chicago's pits can survive the era of computers and the Net.

At first glance, the odds seem stacked against the Chicagoans. Eurex, which plans to power up the trading computers on its new U.S. exchange on February 1, 2004, has grown into the world's biggest derivatives exchange over the last decade by exploiting electronic trading fast -- far more quickly than the Chicagoans. Eurex Chief Executive Officer Rudolf Ferscha, who unveiled his plans on Sept. 16 in Chicago, has to be taken seriously when he promises to give Americans "open and equal access to the world's most reliable and scalable electronic system."

Indeed, a fight fan has only to compare some of the recent records of the Europeans and the Chicagoans to see why Ferscha's promises can't be ignored. In bond-futures and options trading alone, Eurex tripled its volume from 141 million contracts in 1998 to 446 million last year. In the same time period, the Chicago Board of Trade saw its floor volume shrink from 205 million contracts to 142 million, while its overall volume rose slightly, from 217 million to 268 million, only because of a rise in trading on a companion electronic platform that Eurex ran for the CBOT, its former partner.

ALLIES AT LAST. Ferscha, the Germans at Deutsche Borse, and the Swiss at SWX Swiss Exchange who back Eurex as a joint venture would be foolish to count the Chicagoans out, however. Indeed, Ferscha backhandedly complimented the Chicago Exchange, noting that its innovativeness made Eurex possible.

It's no accident that he chose to set up shop for his exchange in Chicago, where he's using the CBOT's former clearinghouse, Clearing Corp., to handle Eurex' paperwork. For one thing, much may come of a newfound common ground between the Chicago Merc and the CBOT, which have put aside decades of feuding and are working together, with the Merc providing clearing services for the CBOT.

Moreover, the Windy City brawlers have other strengths that the new kid will be hard-pressed to match. Eurex, for instance, isn't planning to offer trading in Eurodollars -- the biggest product now traded on the Merc. Independent traders and Merc executives say the foreign exchange's technology simply can't handle complex Eurodollar trading the as well as the Merc's does.

"NO SURPRISE." What's more, some of the proprietary products that the Merc offers, such as licensed NASDAQ and Standard & Poor's index products, are legally off-limits to the newcomers. With more than a touch of chutzpah Merc Chairman Terrence Duffy says he was taken aback by the lack of competitive offerings from Eurex. Says Duffy: "The surprise I got was that there was no surprise."

The Europeans are taking aim at trading in U.S. Treasury securities. Ferscha promises to undercut the Chicagoans in cost. But the CBOT argues that the cost is already lower in the Chicago bourses for many traders -- plus they claim to have an edge in tight bid-ask price spreads. Parrying Ferscha's thrust, Chicago Board of Trade CEO Bernard Dan says, "I'm surprised their costs are so high."

Expect claims and counterclaims to fly like punches in coming months, leading up to the planned start of Eurex trading in February. In the meantime, Eurex is trying to entice big firms to take equity stakes in its U.S. operation.

BURDEN OF HISTORY. Each side will do well to make sure that it stays in competitive shape. Eurex has obviously seen hefty growth in its all-electronic business in the last few years. And while the Chicagoans have labored mightily to preserve the pits -- tweaking their technology to sustain the raucous and colorful trading ovals that generations of traders have trolled for years -- Eurex is unencumbered by such a legacy. Since it doesn't have to please two camps -- old-style floor traders and new technophiles who work on screens instead of in the pits -- it can innovate freely.

For thousands of traders in Chicago and for tens of thousands of customers around the world, this fight will be the knockdown in Chi-town. "People are very excited," says Ray Cahnman, a former CBOT director who chairs the global trading house TransMarketGroup in Chicago. "This is really, really good for commodities trading." No matter which exchange comes out on top, it promises to boost the business for traders, cut costs for customers, and raise the profile of the derivatives industry. Weber is BusinessWeek's Chicago bureau chief


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