Warren Buffett and others have warned about the evils of derivatives—the contracts traded on CME’s Chicago Mercantile Exchange and Chicago Board of Trade. And after every financial debacle, especially the latest, derivatives are trotted out as a cause. Are these things the kerosene on a fire they’re made out to be?
Derivatives didn’t cause the financial crash. Monetary policy, mortgages, and securitized mortgage products, which we don’t trade, did. It’s unfortunately symptomatic of the fact that what we do is arcane. It’s easier to assign blame to things people don’t understand.
Tell me about the worst day here during the financial crisis.
The morning the Fed was not going to rescue Lehman Brothers. A lot of firms were on the brink. But we had no defaults. Our systems worked.
I see it’s 80 percent trading on computer screens now, and just 20 percent in the storied pits. Will you dismantle the pits soon?
I don’t think so. It’s profitable. It’s important. [Screen trading] has been as high as 92 percent, but some contracts, like options, are still best done on the floor.
It’s truly the revenge of the nerds around here—few people understand the abstract goings-on at a futures exchange, yet the market value of CME Group’s stock [$20.5 billion] is now more than twice that of the New York Stock Exchange’s parent. How did CME become the world’s number one financial exchange?
It’s been very, very innovative, very competitive, and incredibly strategic about its position in the markets. It’s been led by a lot of people who’ve devoted their whole lives to the place.
CME itself has only 2,600 employees. But thousands more people from outside trading firms work at your exchanges, and most have good jobs. Can Chicago do even better with this—and if so, how?
We are one of the most significant—if not the most significant—economic growth engines for the Chicago area. But over time, you’ll see CME become more global in terms of where our people are.
Chicago has developed a business inferiority complex—too few growth companies (Groupon and then what?) and too many corporate headquarters defections in recent years. Can we reverse that?
It’s absolutely reversible. But not easily done in the face of [the increased state corporate income tax passed in January].
The makeup of your 32-person board—seats reserved for Mercantile Exchange members’ nominees, some for Board of Trade people, long-ago Merc chairmen hanging around—resembles the merger of a backwoods clan. Yet CME Group is a modern corporation. Looking at it reminded me of a case I wrote about 20 years ago: One of your traders couldn’t appeal a disciplinary action to a higher committee because he’d been sleeping with a committee member’s mistress. Any plans to remake the board as outsiders?
[Laughing] I don’t remember that case. What we’ve accomplished is unique—to combine the Chicago Merc and the Board of Trade [and exchanges elsewhere]. We managed to meld together four very different organizations. [Board size] is a determination to be made not by me but the board.
Photograph: Bob StefkoEdit Module