Why CBOT Should Play the Field


By Joseph Weber An Open Letter

To: Charles Carey, chairman of the Chicago Board of Trade

Dear Charlie,

It's great to feel wanted, isn't it? Just a few years ago, it looked like the days were numbered for you and the rest of the folks at the Chicago Board of Trade. Between those hyper-efficient Swiss and Germans at Eurex and the computer-savvy folks at the Chicago Mercantile Exchange, you and the other corn and Treasuries traders were looking like Luddites. But now, if published reports are true, the Merc and a couple of private-equity firms want to take the CBOT down the aisle -- even before you get a chance to do that long-promised initial public offering.

Charlie, don't tie the knot yet! Those "expressions of interest" you so tactfully referred to just before the Fourth of July weekend may promise fireworks, but you can do so much better if you hold out. Go through with your IPO in the next few months, and put a few quarters of earnings as a public company behind you. Then see what kind of suitors are at your door and whether you're still looking to get hitched.

Otherwise, those folks who want to hook up with CBOT now would get off paying a very low dowry. They would love to win you over for something close to the $1.7 billion you think the exchange will prove to be worth in the IPO. But if the Merc's own ninefold stock-price rise since it went public in late 2002 is any indication, the CBOT could be a more fetching prize someday. After all, the $2-million-a-seat price the exchange commanded just the other day already suggests your stock could be worth nearly twice the $33 to $36 per share price you're expecting.

The Merc started out so small and is now worth more than $10 billion in market value, Charlie!

HOMETOWN SPIRIT. And it's not just the money. Sure, Merc top gun Terry Duffy is smart, a great lunch pal, and a handy ally in all those lobbying fights in Washington, D.C., over foreign exchanges trying to cut into your turf. But he wouldd probably really enjoy being chairman of a combined Merc and CBOT -- even if he isn't saying anything about it publicly.

Where would that leave you and the others who have pulled the exchange from the brink? It was you, Charlie, who linked up computers with the Euronext exchange system in Paris to make cheap, superfast trading possible. And it was you who cut the deal to let the Merc handle all that pesky clearing work, saving over a billion dollars for customers. And it was because of those things that you could send the Eurex folks scurrying away this year, after they failed to snare your huge U.S. Treasuries trading business.

Sure, a deal with the Merc would bring back the title of No. 1 futures exchange to Chicago -- and I know how crushing it was for you when the computerized Eurex folks took the top spot from your trading-pit buddies here a few years ago.

SPECULATING SUITORS. But is the No. 2 Merc really your best partner? Maybe as No. 3, you could do a deal, instead, to take over Eurex (wouldn't that be rich?) or Euronext. The folks at Euronext, as you know, have been running around Europe taking over exchanges in France, Belgium, Holland, and Britain -- and now they want to gobble up the London Stock Exchange.

As for those equity-fund guys rumored to be suitors, forget it. They're just speculators, and they would like nothing more than to buy the CBOT on the cheap and flip it. Remember how Battery Ventures and Blackstone Group made a bundle investing in the defunct London International Financial Futures & Options Exchange? They wouldn't help you out anywhere near as much as they would help themselves.

Plenty of other really intriguing possibilities will come along, too. Once those brainy guys across town at Archipelago Holdings get done fixing the New York Stock Exchange after their own merger in the fall, imagine if you and they teamed up? Investors could then deal in stocks, futures, and options -- all in one place, faster than ever. Of course, Washington might have to catch up by combining the regulators for stocks and commodities. But it's about time they modernize anyway.

ABSTINENCE EDUCATION. Last of all, there's that really novel idea of staying single. You may serve the public best by heading an exchange that will give the rest a real run for their money. After all, the antitrust folks in Washington and your futures customers may not be so crazy about you tying up with someone else, especially the Merc. The two of you combined would essentially own the U.S. futures industry. And that's a real problem for anybody who believes competing exchanges are the best way to maintain innovation.

I know it seems like the whole exchange world is in one huge mating dance, and it's hard for you and your hypercharged trader buddies to play the wallflowers. But you ought to just say no -- at least for now. Exchanges are changing a lot more than they have since the CBOT started, way back in 1848. Even at its age, the CBOT is still too young to marry -- especially since you're only now getting around to dumping that old member-owned system for public stock.

Charlie, do yourself and the other pit-traders a big favor -- play the field for a while. Odds are that you can make great music with one of these other outfits someday, on terms that could be good for everybody. Weber is BusinessWeek's Chicago bureau chief


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