CME's $85 Million Christmas Gift. Bah, Humbug!
Nov 29, 2011
Despite the very public collapse of one of its largest members, CME brass may have 85 million reasons to celebrate this holiday season. Tuesday’s preliminary approval of an annual $85 million corporate tax cut by both the Illinois Senate and House suggests that CME management may be more skilled in the Chicago art of strong-arming than the financial oversight of their member firms.
When CME Chairman Terry Duffy addressed the annual shareholders meeting back in June, Illinois corporate taxes were on every attendee’s mind, especially CME "insiders" who own 5.52% of the CME or 3.7 million shares. In his comments Mr. Duffy said, "We’re investigating what would be in the best interest of our shareholders", an implied threat to move corporate headquarters to Texas, Tennessee, or Florida, states that had already offered the CME a new home.
Speaking of Florida, did you catch any of the CME Group Titleholders LPGA season ending golf championship? Me neither. Probably just a coincidence that the CME sponsored a professional golf tournament in Orlando while chatting with Florida lawmakers about a possible move. Either that or those lady golfers are heavy traders of e-mini S&P’s when they’re not on the course.
The CME’s world has changed dramatically since that June shareholders meeting, especially in the past month. The perceived mishandling of the MF bankruptcy prompted an editorial by Crain’s Chicago Business questioning exchange leadership on November 14th which in turn caused CME stock to trade at a 52 week low of $235.23 on November 17th. Most damaging to shareholders was inaction by the world’s largest futures exchange, which has shaken client’s confidence in trading on the CME and futures exchanges worldwide.
Other than a lot of rhetoric, the CME has really done very little in the damage control department other than pledging $50 million to MF clients and offering what is now a $500 million paper guarantee. It should be noted that the $50 million is actually from the CME’s Trust Fund, which is essentially comprised of fees collected from other clearing members. Management may be satisfied with their work but the lifeline of their business, traders and hedgers, are not and once their confidence is lost the CME’s business is in real trouble no matter how many tax breaks they can negotiate.
What seems to be lost on the CME is the fact that without this confidence, they have nothing more than an art deco building on West Jackson Boulevard (on which they received $15 million in Chicago tax breaks) and some high-powered technical equipment. They seemingly do not understand that they produce nothing. They don’t grow crops, they don’t produce widgets. They don't have anything to sell except a marketplace for others to buy and sell. They own the store, they don't own the products. Buyers and sellers must have confidence in the CME’s marketplace before they bring their goods to that market.
It has taken countless years and untold amounts of risk capital by thousands of independent traders to get the CME to where it is today. Many have succeeded and many more have failed. The thing they all have in common is that they are the ones who built this country’s futures exchanges into the successes they are today. They are the ones that have put their personal net worth on the line day after day to gain client confidence in marketplaces. It’s neither the management nor the technology; it’s the day traders and the night traders that provide liquidity and confidence to bona fide hedgers throughout the world. It’s a disservice to them for the CME to be merely focused on short-term "shareholders interests".
This all brings us back to where we started, an $85 million tax break. CME CEO Craig Donohue said last week that "the protection of our customers and the integrity of all futures markets continue to be our two chief concerns". Well said, Mr. Donohue. Now you have $85 million to put your money where your mouth is.