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Robert Sales
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CME Chairman Weighs in on For-Profit Pursuit, Reveals Thoughts on CBOT/Eurex

The board of directors at the Chicago Mercantile Exchange will receive a "definitive proposal" on demutualization this month, and will then explain and discuss that proposal with the Merc's members.

The board of directors at the Chicago Mercantile Exchange will receive a "definitive proposal" on demutualization this month, and will then explain and discuss that proposal with the Merc's members, says CME chairman Scott Gordon.

In an interview with ETW, Gordon also alleges that the Chicago Board of Trade never took a good look at Globex2--the CME's flagship trading system--before it approved its new alliance with Eurex this June.

Like a host of other exchanges across the world, the Merc's strategic planning committee has recently spent some time evaluating whether it should convert its member-owned exchange into a for-profit, shareholder-based entity. To expedite the process of developing a demutualization proposal, the CME has retained Salomon Smith Barney, which is advising the strategic planning committee, says Gordon.

After "a sufficient discussion period with the membership," he adds, the Merc will ask its members to vote on a for-profit proposal. However, he declines to specify when that vote will happen. The CME is also not yet certain whether it will simply convert its members' seats into shares--via a private placement--or makes it shares available to the average retail investor by issuing an initial public offering.

"Could we envision an IPO within a couple of years? Obviously, demutualization can encompass a privately held transaction and/or a publicly held transaction. And at this point, it's premature for us to unveil our strategy given that we have not made a proposal to our board," says Gordon. "But I certainly would not rule out an IPO."

One opportunity that the Merc did pass on was a chance to join the CBOT/Eurex alliance--a technology partnership which mainly calls for the CBOT to phase out its electronic trading platform in favor of Eurex's trading engine and API by next July (ETW, 6/14/99). The CME, which of course subsequently forged an alliance with the Liffe (ETW, 8/9/99), declined an opportunity to hop on the CBOT/Eurex bandwagon earlier this year.

At the time, Michael Manning --chief operating officer of Chicago-based FCM Rand Financial Services and a member of the CBOT's board of directors--said that one reason the CBOT did not choose the Merc as its strategic ally was because Globex2 had neither the "global reach" nor the volume of Eurex's trading engine. Gordon counters that he does not how Manning reached that conclusion, because the CBOT never "seriously" analyzed Globex2. "From my understanding, I don't recall the CBOT ever kicking the tires of Globex2. And I would tell you that it is a world class engine that has dramatic reach.... So I don't know the basis for what Manning's comment was," he says.

Gordon says that over the past year, the Merc has "dramatically increased" the speed, capacity and functionality of Globex2--partially in preparation for side-by-side daytime trading of its flagship Eurodollar contract. Moreover, he says that the CME is not worried about Eurex potentially listing a Eurodollars product of its own in the U.S.

"We intend to defend and grow our product line," says Gordon. "We perceived a threat a year ago in terms of entities that were looking to replicate Eurodollar futures off exchange. So we made a conscious to decision to ramp up the Globex2 system in order to stave off that competition. And...the mere fact that a moment's notice we can trade 100% of our Eurodollar futures online has kept at bay some of our competition."

That said, if the side-by-side Eurodollars project has thus far proven one thing, its that open outcry trading at the Merc isn't going to fade to black any time soon. "In Eurodollars, during the daytime, volume is 100% open outcry versus zero electronic trading," notes Gordon.

Moreover, the Merc still does 95% of its overall volume in its open outcry pits. "I don't have a crystal ball, but I do know the following: We do 95% in the pit and 5% of our overall volume electronically today, and that spread will narrow. I can't tell you when it will narrow or how it will narrow...but it's clear to me that in the future we will be doing more business online," Gordon predicts.

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