Thanks for that Jeff. Quite the trip down memory lane. I was involved on the periphery of a lot of those events, but certainly did not have the skin in the game that you, Don, or Paul did. But I was a very interested observer and sometime participant in these events.
As an academic, exchange demutualization fascinated me. I wrote a couple of articles about it in 1999 and 2000. The basic thrust of the articles is that the non-profit form made economic sense for floor-based exchanges from a governance perspective, but it didn't make sense for an electronic exchange.
I was somewhat involved in the LIFFE-Eurex Bund battle. In 1994 DTB (Eurex's predecessor) hired me to compare the liquidity of LIFFE and DTB, and I came up with the surprising (not least of all to me) finding that they were roughly equal in liquidity even though the DTB market share was then about 20 pct. The head of LIFFE (Wigglesworth, who passed away last year) dismissed it in the FT as an "ivory tower exercise." Bulletin board material! A few years later when Eurex launched its big push against LIFFE, they used that study as part of their marketing campaign. So I'll take the blame for the subsequent tipping of the market to Eurex. I resisted the temptation to remind Wigglesworth of his dismissal of my research.
LIFFE was like the hare in the fable of the tortoise and the hare. It was so confident of its lead that it didn't respond to Eurex's fee cut. Subsequent work that I did showed that post-cut, Eurex's all in trading costs (fees plus liquidity costs) was well below LIFFE. Which is why the market tipped.
When Eurex went after the CBOT in what, 2002?, by launching the USFE CBOT had learned the LIFFE lesson and it cut fees. But as you note it was in a weak strategic position because it didn't control its technology or its clearing, and had to cut a clearing and trading system deal with the CME, which was predictably just a way station on the road to being acquired.
But IMO CBOT deliberately put itself in that vulnerable position in the mid-90s, especially with the construction of the new floor, thinking that if it invested so much in the floor and didn't invest in its own technology it would keep the electronic wolf from the door. Sunk cost fallacy at work.
USFE sued CME for an anti-trust violation. I was the CME's expert in that case (in which it prevailed).
The clearinghouse fungibility study was from the Antitrust Division of the DOJ, not Treasury. I ripped that study up one side and down the other on Streetwiseprofessor. One thing that struck me about that is that Dennis Carlton, whom you might have known as a student at Chicago, didn't sign on to the study even though he was chief economist for the Antitrust Division. It was clear to me that he thought it was garbage economics--which it was. (Dennis was one of my thesis advisors).
One possible correction. When the Butter and Egg Board transformed into the Chicago Merc in 1919, it established its own clearinghouse. BOTCC was established until 1925, and that only because of an ultimatum from the Department of Agriculture. The CBOT had voted down clearing multiple times. So the lore about CME Jews forming their CH because the CBOT Irish shut them out isn't correct.
The prompt for your story--the case finally going to trial--points out a big problem. The glacial pace of litigation in the US. I am currently involved in a couple of cases dating back to 2011. I would guess that the median time from filing to resolution in the cases I have been involved in is 10 years. And all of those settled before trial. These drawn out cases are largely due to defendant delaying tactics.
It is extremely difficult to see justice done when lawsuits drag on for years, like Jamdyce v. Jamdyce in Bleak House. If for no other reason that something that you note--it's hard to remember what actually happened years ago.
did not know that about the clearinghouse! Lore prevailed. I think this one will go to trial. Both sides are stubborn, and unreasonable. On one side, I know the plaintiffs. One of them was murder to deal with when we were taking control of the board room to get on the road to demutualization. On the other, you have Duffy/Sheperd whom I know well too. Bill has said frequently "you already got paid" and if you knew Bill you'd know how stubborn he is. He is infrequently incorrect. Smart guy. He analyzes things from all angles and takes his time. Once he lands on the decision, it is very hard to move him off of it. Plus, he has the track record of being correct so often.
Since I wasn't privy to the decisions when they were made, anything I say is pure conjecture. I sure feel like the members got taken a bit. At the same time, they weren't going to set up trading operations in Aurora. CME and the members should settle, and eliminate the seats.
As good a summation as anything I have seen. Having been a member (A.M. CBOT) from 1977 until demutualization,
I remember the membership meetings and the hue and cry from both sides of the fence at those meetings. And I understand Paul Richards points in his comments. This story is very much one of "whose ox is being gored" at what point in time. Frankly, I don't understand any of the legalese. I read somewhere that 90% of the lawyers give the other 10% a bad name. I don't know if that's true, but clearly I read a "different English" than they.
I was a terrible floor trader, but I was one of the original 100 Assoc. Mem. Financial products and trading exploded. When leasing of memberships was allowed, I leased mine for over 20 years and went on to do other things leading a relatively normal, quiet life. In my opinion, trading is living on adrenaline 24 hours a day. A sure way to a short life. People like Jeff and Paul (in the comments) saw it differently and had ongoing businesses. They were affected differently by demutualization and trading going electronic.
What am I trying to say? I'm not sure anymore. Other than Jeff's piece is a good summary of a point in time that was fascinating to live through and be a small part of.
As the owner of multiple seats at CBOT since the July 12, 2007 merger, while it is great news that perhaps an agreement can be made between CMEG and some seat owners, where do the rest of us go to be made whole?
From what I have read, CURRENT owners of CME and CBOT seats are members of the 'Class'. I don't see any reference to 2014 or 2021 or anything other than current. AND I see no reference to folks who owned seats but sold them between July, 2007 and the date of the approval of the 'class.'
I do not recall getting anything saying I could opt out, if those would be the terms. But I would be an opt-out, for sure, if I knew it was only seats owned currently. I have just one small seat left today after having sold all the others at a diminished value.
After the merger, seats were devalued in many ways, including how the Class defines these:
Closing and removal of open outcry pits, multiple users on one seat, colocation in Aurora, algorithm changes to benefit HFT traders over individuals, lack of opportunity to lease out our seats, and so on.
When I sold these various seats, they were sold at a discount due to the actions of harm caused by CMEG and its actions. And thus I am harmed to the degree of the days that I owned said seats after 7.12.07.
As Jeff mentions, CMEG has numbered every seat and knows the owners as of which dates. So if I owned that Full x% of the time between the dates, I should receive x% of the compensation.
This would not affect those who owned seats the entire time, but would affect those who purchased them after 7.12.07 to the degree of how long they owned such seat. Someone buying a seat today was not harmed by CMEGs actions and, in fact, are potentially profiting at our expense. They did not take any of the downside risk and should not be taking potentially wimdfall gains from those of us who sold 'in the hole' and did not receive its true value as a result of CMEG's actions.
Where do those of us who sold seats at a diminished price go to be made whole?
Fascinating backstory, Jeff. Thanks. Oh, and the judicial system grinds particularly slow sometimes. And when it comes to trials, that's really risky business ... perhaps even riskier than any of the deals made at the CME or CBOT, back in the day. Cheers.
I wish I knew more about trading as I see no value in a company like FB, et al. I design parts and machines that are created from raw material and then sold at a market.
And then I see banks, traders, and governments buying debt and bonds ending up in more debt leading to bailouts and debt nobody goes to jail for leaving my kids who make $90K and can't afford housing. They can, but are house poor.
I don't mean you, Jeff, just remembering the Gore vs Perot debate in 1993 when I was very young: "If you don't make anything you aren't worth anything(as a country)." Financialization through government printing made a relative few extremely rich.
Thanks for that Jeff. Quite the trip down memory lane. I was involved on the periphery of a lot of those events, but certainly did not have the skin in the game that you, Don, or Paul did. But I was a very interested observer and sometime participant in these events.
As an academic, exchange demutualization fascinated me. I wrote a couple of articles about it in 1999 and 2000. The basic thrust of the articles is that the non-profit form made economic sense for floor-based exchanges from a governance perspective, but it didn't make sense for an electronic exchange.
I was somewhat involved in the LIFFE-Eurex Bund battle. In 1994 DTB (Eurex's predecessor) hired me to compare the liquidity of LIFFE and DTB, and I came up with the surprising (not least of all to me) finding that they were roughly equal in liquidity even though the DTB market share was then about 20 pct. The head of LIFFE (Wigglesworth, who passed away last year) dismissed it in the FT as an "ivory tower exercise." Bulletin board material! A few years later when Eurex launched its big push against LIFFE, they used that study as part of their marketing campaign. So I'll take the blame for the subsequent tipping of the market to Eurex. I resisted the temptation to remind Wigglesworth of his dismissal of my research.
LIFFE was like the hare in the fable of the tortoise and the hare. It was so confident of its lead that it didn't respond to Eurex's fee cut. Subsequent work that I did showed that post-cut, Eurex's all in trading costs (fees plus liquidity costs) was well below LIFFE. Which is why the market tipped.
When Eurex went after the CBOT in what, 2002?, by launching the USFE CBOT had learned the LIFFE lesson and it cut fees. But as you note it was in a weak strategic position because it didn't control its technology or its clearing, and had to cut a clearing and trading system deal with the CME, which was predictably just a way station on the road to being acquired.
But IMO CBOT deliberately put itself in that vulnerable position in the mid-90s, especially with the construction of the new floor, thinking that if it invested so much in the floor and didn't invest in its own technology it would keep the electronic wolf from the door. Sunk cost fallacy at work.
USFE sued CME for an anti-trust violation. I was the CME's expert in that case (in which it prevailed).
The clearinghouse fungibility study was from the Antitrust Division of the DOJ, not Treasury. I ripped that study up one side and down the other on Streetwiseprofessor. One thing that struck me about that is that Dennis Carlton, whom you might have known as a student at Chicago, didn't sign on to the study even though he was chief economist for the Antitrust Division. It was clear to me that he thought it was garbage economics--which it was. (Dennis was one of my thesis advisors).
One possible correction. When the Butter and Egg Board transformed into the Chicago Merc in 1919, it established its own clearinghouse. BOTCC was established until 1925, and that only because of an ultimatum from the Department of Agriculture. The CBOT had voted down clearing multiple times. So the lore about CME Jews forming their CH because the CBOT Irish shut them out isn't correct.
The prompt for your story--the case finally going to trial--points out a big problem. The glacial pace of litigation in the US. I am currently involved in a couple of cases dating back to 2011. I would guess that the median time from filing to resolution in the cases I have been involved in is 10 years. And all of those settled before trial. These drawn out cases are largely due to defendant delaying tactics.
It is extremely difficult to see justice done when lawsuits drag on for years, like Jamdyce v. Jamdyce in Bleak House. If for no other reason that something that you note--it's hard to remember what actually happened years ago.
Thanks again for the post.
did not know that about the clearinghouse! Lore prevailed. I think this one will go to trial. Both sides are stubborn, and unreasonable. On one side, I know the plaintiffs. One of them was murder to deal with when we were taking control of the board room to get on the road to demutualization. On the other, you have Duffy/Sheperd whom I know well too. Bill has said frequently "you already got paid" and if you knew Bill you'd know how stubborn he is. He is infrequently incorrect. Smart guy. He analyzes things from all angles and takes his time. Once he lands on the decision, it is very hard to move him off of it. Plus, he has the track record of being correct so often.
Since I wasn't privy to the decisions when they were made, anything I say is pure conjecture. I sure feel like the members got taken a bit. At the same time, they weren't going to set up trading operations in Aurora. CME and the members should settle, and eliminate the seats.
As good a summation as anything I have seen. Having been a member (A.M. CBOT) from 1977 until demutualization,
I remember the membership meetings and the hue and cry from both sides of the fence at those meetings. And I understand Paul Richards points in his comments. This story is very much one of "whose ox is being gored" at what point in time. Frankly, I don't understand any of the legalese. I read somewhere that 90% of the lawyers give the other 10% a bad name. I don't know if that's true, but clearly I read a "different English" than they.
I was a terrible floor trader, but I was one of the original 100 Assoc. Mem. Financial products and trading exploded. When leasing of memberships was allowed, I leased mine for over 20 years and went on to do other things leading a relatively normal, quiet life. In my opinion, trading is living on adrenaline 24 hours a day. A sure way to a short life. People like Jeff and Paul (in the comments) saw it differently and had ongoing businesses. They were affected differently by demutualization and trading going electronic.
What am I trying to say? I'm not sure anymore. Other than Jeff's piece is a good summary of a point in time that was fascinating to live through and be a small part of.
History does not repeat itself, but human nature does. It's amazing the decisions we make as people.
As the owner of multiple seats at CBOT since the July 12, 2007 merger, while it is great news that perhaps an agreement can be made between CMEG and some seat owners, where do the rest of us go to be made whole?
From what I have read, CURRENT owners of CME and CBOT seats are members of the 'Class'. I don't see any reference to 2014 or 2021 or anything other than current. AND I see no reference to folks who owned seats but sold them between July, 2007 and the date of the approval of the 'class.'
I do not recall getting anything saying I could opt out, if those would be the terms. But I would be an opt-out, for sure, if I knew it was only seats owned currently. I have just one small seat left today after having sold all the others at a diminished value.
After the merger, seats were devalued in many ways, including how the Class defines these:
Closing and removal of open outcry pits, multiple users on one seat, colocation in Aurora, algorithm changes to benefit HFT traders over individuals, lack of opportunity to lease out our seats, and so on.
When I sold these various seats, they were sold at a discount due to the actions of harm caused by CMEG and its actions. And thus I am harmed to the degree of the days that I owned said seats after 7.12.07.
As Jeff mentions, CMEG has numbered every seat and knows the owners as of which dates. So if I owned that Full x% of the time between the dates, I should receive x% of the compensation.
This would not affect those who owned seats the entire time, but would affect those who purchased them after 7.12.07 to the degree of how long they owned such seat. Someone buying a seat today was not harmed by CMEGs actions and, in fact, are potentially profiting at our expense. They did not take any of the downside risk and should not be taking potentially wimdfall gains from those of us who sold 'in the hole' and did not receive its true value as a result of CMEG's actions.
Where do those of us who sold seats at a diminished price go to be made whole?
Fascinating backstory, Jeff. Thanks. Oh, and the judicial system grinds particularly slow sometimes. And when it comes to trials, that's really risky business ... perhaps even riskier than any of the deals made at the CME or CBOT, back in the day. Cheers.
Interesting story as you usually provide.
I wish I knew more about trading as I see no value in a company like FB, et al. I design parts and machines that are created from raw material and then sold at a market.
And then I see banks, traders, and governments buying debt and bonds ending up in more debt leading to bailouts and debt nobody goes to jail for leaving my kids who make $90K and can't afford housing. They can, but are house poor.
I don't mean you, Jeff, just remembering the Gore vs Perot debate in 1993 when I was very young: "If you don't make anything you aren't worth anything(as a country)." Financialization through government printing made a relative few extremely rich.