Is Chicago Stock Exchange in trouble?

January 22, 2009 3:10:04 PM PST
In this economic downturn even the Chicago Stock Exchange is fighting for profits in the view of many analysts. Technological change and intense competition have eroded the exchange's position in the market. Now, published reports claim the exchange has been warned to cut costs drastically or face going out of business. Many of the most profitable stock exchanges -- the NYSE, the NASDAQ, for example -- are owned by some of the biggest players in the market. That makes those "customers" placing trades with "their" exchanges a logical thing to do -- after all, those fees and commissions end up helping people "in house." But the Chicago Stock Exchange relies more on executing trades for customers who don't own a piece of it. And that, combined with a host of other factors, has at least one shareholder group pressuring the CHX to run its business better -- or start firing some people.

The galloping steed outside the Chicago Stock Exchange on South LaSalle gives the impression of movement, but like the virtually frozen credit markets, the volume of trading action here appears to just not be bringing in the money like it used to flow.

"We really are a microcosm of larger markets. Our challenges are those of others," said Dave Herron, CHX CEO.

Herron put out a notice to stockholders Thursday in response to a letter from a dissident shareholder group that says the CHX has only enough money to operate for six months due to below break-even trading volumes.

"We have a board-approved budget that at current business levels we can operate through 2009. Other than we don't comment about our plans or operating expenses," said Herron.

The exchange used to operate in the big space over Congress Parkway -- for which it's paying rent until 2015 -- but now functions in a 30x25 room of computers. Like other stock exchanges, virtually all buying and selling of securities is digitally-driven, and this place monitors 125,000 price quotes a second from around the world.

But, the dissident group says in a draft letter to the CHX obtained by a Chicago newspaper, "[Y]ou have run out of money, shareholder patience and ideas...Unless meaningful change is forthcoming quickly you will have a reckoning that will be unpleasant at the very least." (Signed by Pat Arbor, a shareholder and past chairman of the Chicago Board of Trade.)

The group wants the CHX to cut salaries and people. Herron would not discuss that -- but a trader who often placed trades with the exchange says now, with the $8 billion merger of the Chicago Mercantile Exchange and the Chicago Board of Trade in 2007, perhaps, the 126-year-old CHX may be history.

"When it comes down to it, when you need to really move size, your broker's probably going to send you to a floor where you can do that a very competitive price," said Todd Colvin, MMF Global.

And those of course are the big national exchanges -- like the New York Stock Exchange and NASDAQ -- which it should be pointed out have seen their own share prices plummet in this financial crisis. It's just that Chicago is smaller and thus closer to the financial abyss.

In 2006, under then-chairwoman Valerie Jarrett, the CHX tried to reinvent itself by updating its technology. But trading volume appears stuck at less than 40 million shares per day, according to public exchange records -- and those dissident shareholders -- say it takes more like 100 million to make money.