Forbes Chronicles the CME

By Jennifer Hopfinger
January 30, 2008 01:18 PM

In its January 28th cover story, “Hot Commodity,” Forbes magazine looks at “how the rowdy Chicago Merc became the world's biggest financial exchange.” Writer Emily Lambert chronicles the rise of Chicago Mercantile Exchange chairman Terrence Duffy from the trading pits to the executive suite and how he helped the exchange dodge downfall to become what it is today.

“Over the six years of Duffy's tenure CME has embraced electronic trading, gone public, acquired its onetime largest competitor and increased daily volume from 2.2 million to 14 million contracts. It has pioneered new financial instruments for institutions and attracted individuals with futures for stock indexes, real estate prices and the weather,” Lambert writes.

But the Merc used to be a very different kind of exchange--“a clubby fraternity” that traded via open outcry. Duffy, who started out as a runner at the Merc and then later became a broker, bought a seat on the exchange in 1984 and joined the board in 1995. Volume--and the price of a seat--dropped significantly in the 90s, and the Merc was faced with a choice: adapt or die. Duffy was elected chairman in 2002, and that year, the Merc became the first U.S. exchange to go public, which helped it raise the capital needed for new electronic trading systems.

According to the article, the transition to electronic trading was met with enormous resistance. The culture of open outcry was firmly entrenched and members balked at giving it up. When a European exchange challenged the Merc’s biggest contract--Eurodollar futures and options--by offering a faster and cheaper electronic contract, the Merc was forced to act, and it moved Eurodollar futures online.

Duffy also tackled the merger with the Merc’s rival, the Chicago Board of Trade. As one entity, the exchanges would be much more competitive, but bringing together the two old enemies was a contentious undertaking--made even more difficult by competing bids and questioning regulators. Duffy pulled it off, but he’s still got his hands full with competitive pressures. Now, “the CME Group is going up against its own customers--banks like Barclays, JP Morgan and Merrill Lynch, that is--by introducing over-the-counter derivatives, including interest-rate swaps. Some of those same customers are challenging CME's monopoly by forming a new exchange that will list Treasury futures.”

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism