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Online Extra: The CBOT: "We're on the Offense Now"


Many market watchers gave up the 156-year-old Chicago Board of Trade for dead in recent years. Eurex, the all-electronic Swiss-German futures exchange, passed the CBOT to become No. 1 in the futures trading business in 1999, and the powerhouse has steadily widened its lead since.

The hoary old CBOT, sitting in its 73-year-old Art Deco tower in Chicago's famed Loop, even slipped behind its more computer-savvy longtime rival, the Chicago Mercantile Exchange. The problem: The CBOT's members resisted the move to computerized trading, preferring the loud and colorful pits, even while corporate customers and other traders flocked to screen-based trading.

This year, the early obituaries seemed seemed far more believeable, as Eurex debuted its own spanking new U.S. exchange. Eurex took up residence in the Sears Tower, just across town, and promised inexpensive, efficient trading for futures on U.S. Treasury securities -- the CBOT's most important contracts. Forget those slow and raucous pits, Eurex officials told customers.

PRICE FIGHT. But, under Chairman Charles P. Carey, a longtime corn trader, and hypercompetitive and tech-savvy CEO Bernard W. Dan, the CBOT has beaten back the Eurex threat. Its volumes in U.S. Treasury securities futures are soaring, while Eurex looks feeble. How did Carey and Dan pull it off? First, they tied up with Paris-based Euronext-LIFFE, a rival to Eurex, to handle electronic trading, after the CBOT and Eurex ended their own partnership.

Still more dramatically, the duo cut the CBOT's fees for trading on Treasury futures by 75% or more. Together, the moves made Eurex look like less of a bargain, even as the price cuts drew a lawsuit from Eurex, charging predatory pricing by the CBOT.

Now, as Eurex plans to cut its trading fees on Treasury futures to zero for the rest of this year, it's clear that the lumbering old CBOT has won round one in this battle. Longtime traders are calling Carey a "savior." But the war is far from over with Eurex. The big European exchange is planning to build up it U.S. arm into a fully global bourse, trading a full menu of U.S. and European futures and options.

Carey recently talked with BusinessWeek Chicago Bureau Chief Joseph Weber about how he's girding himself for coming new stages in this fight. Edited excerpts of their conversation follow:

Q: You've won the first round here, how did you do that?

A: It appears, if you do a comparison of volumes that, yes, the first round goes to the Board of Trade. I think when you look back at what was done, we clearly made some choices that we knew would lead to competition. But we wanted autonomy, we wanted control of our destiny, so we went with the LIFFE-Connect platform -- we chose a superior platform, better functionality. We thought it better suited the needs of the marketplace. That was step No. 1.

Step No. 2 was taking control in a way with Common Clearing and a Common Clearing Link [with erstwhile rival, the Chicago Mercantile Exchange]. We produced something along the lines of $1.7 billion in savings to the users, created tremendous efficiency, standardization.

Then we went into a series of initiatives last summer and into the fall that dealt with access, "the European permit." We went on the attack in London and places that we knew were producing tremendous volumes for Eurex. We said, look, these are global traders. They want to trade product, and they want opportunities. So we put out a permit that allowed them easy access, lower pricing, and we actually put together some technology packages that assisted them to get hooked up to the Chicago Board of Trade. This was kind of a departure from the member-nonmember mentality.

Q: Let me ask you about the first round of the competition in price-cutting: You dropped your prices pretty substantially.

A: That was actually the last piece that was done. What we did is we both opened up access and we looked at our pricing to make sure it was competitive with what was coming along.

Q: At the time you said it was a temporary measure. How long will it last?

A: I don't know that we said it was temporary. We're always going to review pricing to make sure that it reflects the competitive environment.

Q: So you don't have a time frame for when prices might go up?

A: Absolutely not.

Q: Do you see any reason to raise the prices at this point?

A: No. I think the board will take it up in the next couple meetings. I think we'll have a discussion, but I think...we're still focused on growing our market share and expanding our distribution.

Q: What about this new price cut, to zero, by Eurex? Will it lure any volume away?

A: That's hard to say, but our fee structure is very competitive. And I think we've got the liquidity. When you go to this level of fees, at the end of the day the business and the liquidity are going to drive the business more than fees of zero or 10 or 20 cents. Nobody can sustain their price model forever. It would be like the dot-coms saying "we're losing money, but we'll make it up on volume."

Q: Have you been able to make it up on volume?

A: If you look at first-quarter results and the monthly results, we're setting records every month. So even at these substantially reduced prices, we're still a profitable enterprise.

We made it up on volume and lower costs on certain significant technology investments. Eurex's platform was expensive, plain and simple. It was an arrangement that was negotiated on more than one occasion. It started out as an alliance and became a vendor agreement.

Q: You see no need to respond now to Eurex, but are you leaving the option open?

A: Always. We're competitive. But right now we feel pretty confident we're priced right.

Q: Eurex has claimed, I'm sure you seen the lawsuit, that your price cuts were actually predatory. What do you think of that?

A: I think that suit is frivolous. Predatory? Our nonmember fee is higher than any of their fees. How is that predatory? I mean, I don't know who their lawyers are, but it's typical.

Q: One thing they've done is they seem to have prevailed in most of the places, whether in the markets or the courts -- their market share is up. They put the LIFFE [the London International Financial Futures & Options Exchange] out of business. How is your situation is different?

A: Well, people didn't want to believe it was different. But we started out with an electronic platform, and we went to another electronic platform. And when they went after the LIFFE, they repatriated, with the help of the German banks, their own Bund contract. And in addition, they went after a marketplace that had only open-outcry as its method of execution, and that clearly wasn't the contest here. I thought that to be somewhat bothersome when the press continued to ignore the fact that so much of our market-share was being driven electronically.

Q: Did you ever have an "a-ha" moment, when you saw the need for electronic trading?

A: When LIFFE lost the Bund back to Eurex. That was a wake-up call to everybody, back in late 1997, early 1998. That meant electronic trading was here to stay. It wasn't somebody's fantasy anymore. It was a method of trading that was being embraced by the marketplace, and we needed to meet that need, we had to provide a strong electronic platform -- which we have done, originally with the alliance with Eurex and now with LIFFE-Connect.

Q: Why have you and CEO Bernie Dan gotten along so much better that previous chairmen and CEOs?

A: I think we both come from similar backgrounds. We're both West Side Irishmen and are goal-oriented and want to see success for the exchange. We haven't been around in the jobs long enough to have big egos. I think there's tremendous chemistry between Bernie and myself. We call each other 5 or 10 times a day, solving problems. It's a good synergy.

Q: You've mentioned the efforts in Europe. Maybe you can tell me a little bit about what you're doing there. It would seem to me, whether it's an answer to have a global link or not, that you'll both be global then. They'll be here, and you'll be there. You're both competing.

A: We're on the offense now. We wanted to take ourselves out of defense. That was one of the reasons. We wanted to control our own destiny. We wanted to be able to take control, and what we did was we chose a new platform.

Q: Why would somebody say in London want to trade on the CBOT instead of Eurex?

A: Superior platform, No. 1. Superior use of your capital, No. 2. Why would you put capital to trade Treasury bonds at the Eurex Clearing Corp. and the Common Clearing Link?

Q: What if they come up with products that are unique to them? Is it possible they could come up with a whole product mix that would be unique and wouldn't necessarily hurt you?

A: Yeah, it's quite possible. They're a platform, and if they have product that's not being offered to the marketplace, I think they would be successful if the demand is there. Why not?

Q: And they're talking about getting proprietary product, as you know, European stock indexes and Russell index. Is that in anyway a threat to you?

A: I don't view it as a threat. I think people are going to trade the Dow Jones, I think people are going to trade the S&P, people will trade the Russell. I think the equity market is a very large market, people are looking to allocate. So if they create the liquidity in those products because they have the proprietary brand name, I think there's room.

I don't think it's a zero-sum when it comes to the exchanges. I don't think because the Russell trades, the Dow won't trade. I think they'll both trade.

Q: You still maintain a pit for Treasurys, which does a small volume. Why bother doing that? It's expensive. Why not just go all-electronic?

A: Well, the fact of the matter is we're still doing similar volumes on the floor that we were doing four or five years ago. The problem is -- it's not a problem -- the good side of it is the electronic growth has been nothing short of fantastic.

Some customers, in volatile times, put all their orders into the pit because they want the human interface for those volatile periods when you can't get a bid or an offer on the screen.... They're still viable in some of the services they provide. They're there for a value-added service, and as long as people want to send their order to the pits, we're going to keep them open.

Q: So it's just not worth it to close the pits? Do you think it will be, if the volume gets up to 95% or 98% [electronic]?

A: I'm not going to speculate. Right now it's working, and it's growing, and the marketplace is voting with our model. A lot of these arguments we've heard before the contest started. Now we're five months later, and we're hearing the same questions, and I'd have to say that the marketplace is voting with us right now in this particular complex.

Q: What I'd heard is that you guys are doing about as much volume in England as they're doing here. Neither of you has been able to penetrate the home markets of the other that aggressively.

A: They're doing zero Treasuries in London, and we're probably doing very little Bunds, but the fact of the matter is they're getting 30% of their volume in Chicago in the Bunds. That's what I was told.

Q: Looking forward, Eurex is still a pretty imposing force.

A: Oh yeah, they got deep pockets, they'll be around.

Q: Deep pockets, smart people.

A: Vs. not smart people? We're street fighters, we're survivors.

Q: I do wonder if they knew what was going to happen. Did they miscalculate?

A: Yes, they did.

Q: What were the miscalculations?

A: They underestimated our resolve, clearly. We were not going to take them lightly. It was like they were riding in a train car, looking backwards and out of an observation deck. They didn't know that we were looking forward. They were looking back.

They basically gauged their experience with the Board of Trade, felt it was always going to be that way, and they didn't recognize that Bernie Dan was different than previous CEOs, and he was very experienced and very knowledgeable within the industry. And I think they viewed me as corn-trader who didn't know what I was doing. But I was prepared to compete. That was the one thing they clearly underestimated.

Q: Do you think you might go public?

A: It depends. We could. That's one of the options.

It's an exciting time to be around here. It's not dull. You know the growth in the industry is nothing short of fantastic. I think with these advances in technology the world gets smaller and smaller all the time, and the trading just increases. [There's] the need to offset risk and the need to be involved in markets like this. It just seems that we don't know where the growth stops, but I think it's got a long way to go.


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