Chicago Takes On Europe

A newly revitalized Chicago Board of Trade is fending off Eurex -- for now

To the Europeans at the world's largest futures exchange, Eurex, Charles P. Carey may have looked like a hayseed. The jovial, burly chairman of the Chicago Board of Trade is much happier trading corn futures in the raucous pits than hosting meetings in the exchange's elegant boardroom. Eurex officials, who pan the open-outcry pits as a throwback to the precomputer age, won't say what they thought. But Carey figures "they viewed me as a corn trader who didn't know what I was doing."

If so, the Swiss and Germans who run Eurex are the ones who look like rubes now. Five months after Eurex launched an effort to steal the CBOT's mainstay business in trading U.S. Treasury contracts, the 156-year-old Chicago market is posting record volumes. In May it handled 45.8 million financial-futures and options contracts, up 26% in a year. Eurex U.S., ensconced in its spanking new offices in the Sears Tower, has barely laid a glove on the CBOT. It started with 255,007 Treasury contracts in February, but that fizzled to a paltry 51,556 by May. Says Carey, whose uncle and grandfather led the CBOT: "I was prepared to compete."

Compete he did. Carey, 50, a CBOT member for half his life, took over as chairman in March, 2003, and issued an immediate call to arms. Working with the CBOT's equally competitive CEO, Bernard W. Dan, he linked up with Eurex' Paris-based rival, Euronext.liffe, for souped-up computerized trading. Then he buried the hatchet with the CBOT's fierce crosstown rival, the Chicago Mercantile Exchange, and reached a deal to cut margin requirements and other costs to customers who trade on both exchanges by at least $1.7 billion a year. Finally, Carey cut trading fees on U.S. Treasury futures. For example, the $1.25-a-trade fee for nonmembers was trimmed to just 30 cents. The package was a winner: With it, "there wasn't any reason to switch" to Eurex, says Mark S. Rzepczynski, president of Boca Raton (Fla.) trading firm John W. Henry & Co.

Carey may have won the opening skirmish, but the Europeans aren't crying uncle yet. On June 22, Eurex announced plans to eliminate all fees for trading U.S. Treasury contracts from July 12 until the end of the year. And it will share up to $40 million in rebates with frequent traders to lure their business over the next two years. So far, the CBOT says it has no plans to match those deals. What's more, if regulators agree, Eurex will turn its U.S. operation into a global trading system by the end of the year. It wants to let Europeans and Americans trade a full menu of debt and equity-index products seamlessly in each other's markets, clearing the trades either in Chicago or Europe and thus greatly expanding the pool of potential Eurex U.S. customers.

With its deep pockets, Eurex can afford a prolonged fight. Chief Executive Rudolf W. Ferscha maintains that the CBOT's price cuts, affecting only the products Eurex offers, are predatory. Eurex has filed suit against both the CBOT and the Merc for allegedly working together to shut it out -- something Carey dismisses as sour grapes. Meanwhile, Eurex insiders in Frankfurt hint that the exchange's parent, Deutsche Börse, may be willing to swallow losses of more than $48 million this year to secure its U.S. toehold -- and to give the venture at least three years to begin paying off.

Whatever the final outcome of the battle, Carey has proven himself to be a surprisingly effective change agent at the CBOT. The steps he took to deflect the first attack from Eurex might appear simple and obvious in hindsight, but they were far from easy at a hidebound institution seemingly intent on writing its own obituary.

Longtime members, who own the CBOT and make their living in the pits, merely shrugged as Eurex surpassed it in 1999 as the world's busiest futures exchange. As Eurex squashed other exchanges in short order -- forcing the once-pits-based London International Financial Futures & Options Exchange to sell out to Euronext -- the CBOT seemed more consumed with internal politics than with defending its turf.

Between 1999 and last year, two chairmen and two CEOs came and went after feuding over the future role of the pits. The self-inflicted damage was painful. Last year, Eurex' overall volume topped 1 billion contracts, double the CBOT's 454 million. Even the longtime No. 2 in Chicago, the increasingly computer-savvy Merc, moved further ahead of the CBOT, handling 640 million contracts.


For Eurex, taking direct aim at the CBOT's near monopoly on trading U.S. Treasury contracts made a lot of sense. "Prior to Eurex coming over, the Board of Trade had a very arrogant attitude, and they were overcharging," says Ray Cahnman, who chairs Chicago's Transmarket Group Inc. trading firm. Eurex thought it could quickly take advantage of the perception that the CBOT offered poor service and "outrageous pricing," he says. Adds Futures Industry Assn. President John M. Damgard: "Nobody ever thought the Board of Trade would be able to compete. You don't know how to compete until you've competed."

Plenty of people were eager to see a rival for the CBOT's Treasury business. So Eurex had no trouble signing up such big players as Goldman Sachs (GS ), Lehman Brothers (LEH ), and Citigroup (C ) as financial backers. Federal Reserve Chairman Alan Greenspan supported Eurex' application to the Commodity Futures Trading Commission to operate as a U.S. exchange. The FIA and the American Bankers Assn. urged the commission to approve the application.

Are these groups disappointed with Eurex so far? Not really. After all, their members can now trade Treasury futures at bargain prices. "It has been very, very good for customers and it has been very, very good for the firms," says the FIA's Damgard. "I will be forever indebted to Eurex for making the effort to come here."

It has been good for Carey and the board, too. Even though they cut trading charges, they've more than made up for that in volume. The board's 24% rise in revenue in the first quarter this year, to $101 million, boosted net income 9%, to $16 million. The profit, helped by a surge in trading in the agricultural pits, amounted to more than half of last year's entire net income of $31 million. The result: The price of CBOT seats has nearly quadrupled, from as low as $240,001 in May, 2002, to $910,000 in the most recent sale on June 21.

Carey has been treading carefully around an emotional issue for many of his members: the future of the pits. For now, he says, they'll stay, even though their importance is diminishing. More than 90% of the trading in Treasury futures is now handled electronically, up by more than 10 percentage points from last year. For complicated options on Treasury futures, some customers find computerized trading not up to the job, and in volatile times, some think information such as who is buying and selling -- sometimes apparent in the pits -- makes the pits more valuable. "As long as people want to send their orders to the pits, we're going to keep them open," says Carey.

For Eurex, the setback means that the exchange must look for other corners of the market. It plans to give U.S. customers better access to trading futures and options in German government debt. And it aims to host trading in futures and options on European and American equity indexes, including the Russell 1000 and the EuroStoxx 50. But when it comes to Treasuries, the Chicago boys -- "we're streetfighters, we're survivors" says Carey -- are still very much on top.

By Joseph Weber in Chicago, with David Fairlamb in Frankfurt

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