A WINDY CITY SQUABBLE THAT'S REALLY THE PITS
At first glance, Pat Arbor and Jack Sandner seem like they were made for each other. Both overcame troubled childhoods on Chicago's streets to hit it big in the Windy City's famed commodity pits. Both rose to become chairmen of their respective exchanges--Arbor at the Board of Trade and Sandner at the Mercantile Exchange. Patrick H. Arbor, 58, is a doting grandfather. John F. Sandner, 53, shares his home with seven adopted children. Both are health nuts: Arbor climbs world-class mountains, and Sandner, a onetime boxer, works out routinely in the gym adjoining his office.
So why can't these guys get along? In the two years since Arbor assumed the helm at the Board of Trade, the Chicago exchanges have become a battleground. Instead of working together to make their institutions more efficient and customer-friendly, an ugly personality clash has Sandner and Arbor operating at cross-purposes. Meanwhile, innovative foreign exchanges such as London's LIFFE, Paris' MATIF, and Brazil's BM&F have developed attractive new contracts that are stealing an increasing share of worldwide futures-and-options trading. While Arbor and Sandner have fiddled, Chicago's status as the global center of futures trading has eroded (charts).
KEY TECHNOLOGY. There isn't much the two won't fight about. Disputes have ranged from petty squabbles, such as which exchange has more volume, to destructive bickering over critical issues. Last year, for instance, bitter infighting split a proposed partnership for the Globex electronic-trading system, a key link to customers overseas. Arbor's Board of Trade went off in a huff to develop its own system, and now futures traders have to learn both. Fighting also scuttled efforts to unify trade-clearing and banking, moves that would have sliced administrative costs at both exchanges while bettering their ability to guarantee trades.
Many fear that if such behavior continues, the next casualty will be a current joint effort to develop handheld trading computers, a key technology aimed at reducing costs and curbing fraud in Chicago's turbulent markets. "It's just nuts for the two exchanges to be fighting each other when the real competition is overseas and in over-the-counter markets," says John F. Benjamin, managing director of Smith Barney Inc.
Even in a world where paramedics stand by to treat injuries from the daily ruckus in the pits, Sandner and Arbor "appeared stupid and silly," says Robert K. Wilmouth, who heads the National Futures Assn. "They probably recognized that." Indeed, in recent months the two chairmen insist that they have cooled down their feud. Sandner attributes their disagreements to a "learning curve" as the pair got to know each other. "That's now out of the way," he says. "We can take the confrontation out of the issues." Arbor concurs: "We're going to be working closer and closer together."
But futures-industry members aren't holding their breath. "The nature of this business is competition," says John M. Damgard, president of the Futures Industry Assn. "It makes it almost impossible for them to shake hands and say, `We are Chicago."'
To a degree, the trouble between Arbor and Sandner reflects a longtime rivalry between their constituents--the boisterous, sweaty floor traders who have viewed one another as the competition for generations. But it's more than that. For all they seemingly have in common, the two chairmen also have opposing personalities. Sandner, the former boxer, is combative and decisive. Arbor, the cerebral mountain climber, is a charmer who relies on smooth talk and compromise to win his way. What they share is a fierce stubbornness. All told, it makes a volatile brew.
Although they grew up in different neighborhoods, Arbor and Sandner both were born into troubled working-class, Irish-Italian families. Each suffered because of a parent's alcoholism. Sandner, who had a hard-drinking father, dropped out of Catholic high school at age 16 to pump gas. It didn't help that his straitlaced teachers disapproved of his one big accomplishment: a citywide dance-contest victory that landed him on the front page of the Chicago Sun-Times. Arbor hit bottom as a teen when his divorced mother's drinking forced him into Mercy Home for Boys & Girls, a Catholic-run orphanage in Chicago.
Strangers helped them both. For Sandner, it was former world middleweight champ Tony Zale, who saw potential in the unruly teenager and persuaded Sandner to clean up his act. Under Zale's iron thumb, Sandner became a disciplined amateur boxer with a 58-2 record. He made up lost time at a new high school and won an athletic scholarship to the University of Arizona.
Likewise, Arbor found role models in the tough priests at Mercy Home. A bookish kid, he embraced their stoic philosophy. To this day, he has never sampled alcohol, tobacco, or caffeine. He trains to the point of exhaustion for his climbing expeditions. "They're fiercely independent people who've had to fight hard for everything they've gotten," says Hal T. Hansen, president of Cargill Investor Services Inc.
Neither had auspicious starts in the pits. Sandner, who attended University of Notre Dame Law School, started practicing law in Chicago but traded pork bellies during his lunch hour. He lost his first stake within a few weeks but soon got the hang of it and gave up law for livestock futures. Arbor started out teaching high school and then served as mayor of Harwood Heights, a blue-collar Chicago suburb known for its all-night taverns. As a teetotaler, he pushed for reforms but also answered a want ad for a Board of Trade grain company. Within a few years, he hit it big as a trader--then went bust. He rebuilt his stake by working in construction and returned to the pits for good.
SHOUTING MATCH. Both men became well-regarded futures executives and worked hard in exchange politics. Sandner took over the Merc in 1991, Arbor the Board of Trade two years later. Before then, the exchanges were pushing for cooperation. And though the chairmen vowed to continue and arranged a few one-on-one dinners to discuss the future, the honeymoon didn't last.
One by one, common ventures fell apart. A plan to unify trade-clearing operations exploded in mid-1993, when Sandner formed a separate partnership with the New York Mercantile Exchange. In dueling press releases, an angry Arbor accused Sandner of bad faith, while Sandner claimed to be "surprised and disappointed" by Arbor's reaction. The acrimony spread into Globex negotiations, with Arbor accusing Sandner of going behind his back to hold private meetings with their fellow partners. Sandner denies this. By last year, the feud spilled into Chicago Mayor Richard M. Daley's office. Hizzoner had to separate the pair during a shouting match over how to organize a charity boxing benefit pitting Board of Trade members against Merc members.
While both insist such antics are behind them, insiders fear the development of handheld trading computers will be the next initiative to sour. Not surprisingly, the two have different strategies for pushing ahead with the system--how fast to introduce it and how much to spend on future development.
Even if the handheld-computer project proceeds, there are other problems. Given the foreign competition, Arbor and Sandner will need to work as teammates to keep from slipping further behind. Most of Chicago's volume growth has come from contracts introduced more than a decade ago. And a blockbuster product of the future is nowhere in sight. Member firms say that instead of bickering over mutually beneficial issues such as unified trade-clearing, the exchanges should be looking hard for that new competitive weapon.
In fact, many members think Arbor and Sandner should merge the exchanges to provide a unified front against competition. Both chairmen say they'd consider it. But in the elbow-throwing, every-man-for-himself atmosphere of Chicago's pits, unity is already an elusive concept. And Sandner and Arbor have enough trouble just being civil.
JOINT EFFORTS HAVE SOURED...
SCUTTLED A joint venture for Globex, a computer network that allows 24-hour trading for customers worldwide. The Board of Trade has launched a competing system, increasing costs for customers that use both.
SUNK Negotiations for unified trade-clearing and
banking. Common clearing would streamline staffs and cut costs for both customers and the exchanges.
THREATENED Development of handheld trading computers. Billed as an antifraud measure to replace the paper cards still used to record transactions, the devices also would reduce errors and cut clerical costs.By Greg Burns in Chicago