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Let’s Make a Deal

Chicago’s preeminent financial institution arose from decidedly humble origins.

A scene from the trading floor, aka “The Pit,” circa 1900. This building was demolished in 1929 to make way for the current building.

Traders circa 1949 taken by a young Stanley Kubrick for Look Magazine

 

The Chicago Board of Trade Building

 

Shots of a man in front of a trade board

Carl Sandburg famously labeled the Windy City “hog butcher for the world,” but the second line of his timeless poem “Chicago” was just as descriptive: “stacker of wheat.”

As author Jeffrey L. Rodengen relates in his book Past, Present & Futures: Chicago Mercantile Exchange, it was the diversity of agricultural products coming in and out of the city—due to Chicago’s centralized Midwest location, the convergence of major railway lines and its nearness to Lake Michigan and the Mississippi River—that made it a mecca for farmers and their wares in the mid-1800s. South Water Street, or “The Street” as it was known back then, became the first recognized marketplace district in the region, with fruit and vegetable merchants operating in the far eastern end and poultry, meat and dairy peddlers working the west.

The major commodity of the era in this prairie land, however, was grain. And in 1848, a group of 82 Chicago businessmen who relied on the farmers’ harvest for their livelihoods banded together to form The Board of Trade of the City of Chicago—later thankfully shortened to the Chicago Board of Trade—as a central meeting place to discuss matters of mutual interest. Those matters included a collective decision to stockpile large quantities of grain to stabilize prices and even out the supply chain, which tended to be bountiful in the summer and fall, but sparse in the spring.

Meanwhile, merchants and distributors for other commodities continued to view Chicago as their trading floor. The city became America’s leading corn market by 1851, the nation’s lumber capital in 1860 and the meatpacking center of the land by the Civil War. In 1865 the CBOT listed the first-ever standardized “exchange traded” forward contracts, known as futures contracts. As the notion of central clearinghouses for commodities increased in popularity, Chicago’s butter and egg dealers decided to use the CBOT model to create their own consortium.

The Chicago Produce Exchange was established in May of 1874, a modest forerunner to the latter-day Chicago Mercantile Exchange, or “The Merc.” The produce exchange opened inside a hall at the corner of Clark and Lake streets and did little more than record trading statistics. It actually closed due to lack of activity in 1878, only to reopen four years later.

From those relatively modest beginnings, the CBOT now ranks as the world’s oldest futures and options exchange. And after its unprecedented merger with the CME in July 2007 to become CME Group, it’s a dominant multinational entity that deals in virtually every commodity imaginable and affects trades valued in the trillions (with a T) every day. That could explain why traders wear such great suits.

The CBOT and CME exchange was not particularly expected. Their histories and cultures were divergent, and their rivalry… well, it wasn’t exactly Hatfields and McCoys, but not much love was lost between the two.

“You’re right, there were many people who never thought the two institutions could come together, even though it made the most amount of sense,” says Terry Duffy, the CME executive chairman since 2002. “I took the company public, and one of my first objectives was to figure out a way we could do a transaction with the Chicago Board of Trade that made the most economic and strategic sense for this company going forward.”

Like the Hatfields and McCoys, however, there was at least one person who liked a member of the opposite camp. “As it turns out, one of my dearest friends was, and still is today, Charlie Carey, chairman of the Chicago Board of Trade,” says Duffy. “We used to trade together in the ’80s. We were looking at different strategic moves, and Charlie signaled that he thought it may be the right time to have the conversation about putting the two organizations together. Obviously, I didn’t miss a beat.”

A last-minute counterproposal from another exchange prompted CME to boost its offer price to more than $11 billion, but “in the end, it was well worth the value,” says Duffy. Today CME Group maintains strategic alliances with exchanges in Brazil, Mexico and Kuala Lumpur; owns the New York Mercantile Exchange for trading energy futures; and has employees based in Europe, Asia and Latin America. “Chicago is our headquarters; the world is our market,” says Duffy.

“The lesson I have learned is to stay focused on what brought you to the dance, and make sure you’re always innovative and looking for the next great idea. That’s what this company’s about. We understand competition is going to always be there. I always say, if we didn’t have competition, we’d still be trading butter and eggs. But we’re not: We’re trading every major asset class.”