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. Last Updated: 07/27/2016

Pace of Change Challenges Exchange




CHICAGO -- After more than 150 years at the top, the Chicago Board of Trade can no longer call itself the world's largest futures and options exchange.


It has been eclipsed by an electronic marketplace called Eurex, formed nine years ago and adopted last year in a merger of the German and Swiss derivative exchanges.


Though the board of trade remains the biggest futures and options exchange in the United States, it is torn over just how to meet the growing challenge of electronic trading systems, the same challenge facing the nation's biggest stock exchanges.


Whether the once-pioneering board of trade - which began as a place to trade commodities and now incorporates complex financial instruments - can retain its domestic leadership depends in part on its ability to put internal squabbles to rest.


For much of the last year, the board of trade has been mired in a series of nasty disputes that have thoroughly disrupted operations and pitted its chief executive against its chairman. More recently, the disputes have set a group of traders against the chief executive and the board of directors.


Seat prices at the exchange have plummeted 25 percent in the last month, and other firms are having second thoughts about alliances with it, fearing gridlock, people who work there say.


"These issues are symptomatic of the problems going on here," said Jacob Morowitz, a longtime exchange member. "We are directionless and rudderless. We don't have leadership."


The latest volley in the dispute came just a week ago, when board of trade members - mostly traders and brokers in the agricultural and financial trading pits - voted in favor of four petitions seeking, in part, to curtail the power of the board and Thomas Donovan, the longtime chief executive and president who has pushed for more electronic trading.


That move came just months after David Brennan, the chairman popular with the traders in the pits, tried to oust Donovan in a coup attempt that was strongly rebuffed by the board.


The two men say they have since buried their differences, but people close to them say they are merely being cordial and that bad feelings remain.


Donovan has overseen the day-to-day operations of the exchange for more than a decade; last month he received a series of petitions that forced him to make his salary public and stripped him of the power to nominate public directors. He published his salary - $1.4 million a year - then derided the petitions, calling them the work of a small group of dissidents bent on undermining top executives at a critical time. "While we're doing this," he said, "Rome is burning."


The cry is a familiar one these days in the United States' financial markets, which face a period of upheaval brought on by rapid technology and rapidly increasing investor demands.


"The exchanges ... had a system that worked for more than 100 years, and now there's a more efficient system," said Barry Lind, chairman of Lind Waldock, a Chicago discount futures broker "If the exchanges don't adapt, they die."


The Chicago board's divisions surfaced more than a year ago, when the membership narrowly voted out Patrick Arbor, a pro-technology chairman, in favor of Brennan, a 41-year-old soybean trader whom Arbor dubbed "a member of the Flat Earth Society" partly because of his opposition to an alliance to build a joint electronic trading platform with Eurex.


Shortly after Brennan took over, the members voted to end the alliance. Later, it reversed that decision and agreed to spend $50 million on a link with Eurex scheduled to begin operation next year.


Brennan now says he is an enthusiastic backer of the plan.


In an interview in his office recently, Brennan looked confident. He said he had named a task force to study how to speed decision-making at the exchange so that it can compete better with electronic upstarts.


Challenges are coming from Cantor Fitzgerald, a large broker that has begun trading futures electronically; possibly from the NASDAQ stock market; and from BrokerTec Global, an electronic alliance formed by the biggest Wall Street firms, all members of the board of trade.


"The seven largest firms are going into competition against us," Brennan said. "We need to modernize and get ready to compete."


Brennan and Donovan do agree that the exchange should do what it has long done best: hedge. They will offer electronic trading and open outcry trading side by side and let the customer choose.


The exchange will also reduce the number of people on its floor and use computers to create a faster route for transactions to get to the trading pits.


By forming the alliance with Eurex, the exchange hopes volume, down 8 percent this year, will begin to rebound next year.