Traders, Technologists Weigh Cost Of A CME Move

CHICAGO (Dow Jones) -- The parent of the Chicago Mercantile Exchange and Chicago Board of Trade put a price tag on continuing to do business in its hometown: an extra $50 million a year following a tax rise last January.

It's tougher to figure the cost of uprooting its electronic trading systems, clearinghouse, management and staff -- plus the knock-on effects for firms forced to reconfigure their business with the world's biggest futures exchange operator.

CME Group Inc. (CME) has spent the last month jockeying with lawmakers in Springfield, Ill. over a deal on taxes structured to halve the company's bill to the state, home to its exchanges for 163 years, only to see the proposal flounder last week.

Illinois politicans will take another run at passing the package next week, but CME still has rival suitors on the line. Last Friday, Executive Chairman Terry Duffy took a meeting with Indianapolis Mayor Gregory Ballard who pitched his state as a more attractive home for CME.

Indiana, Florida and Texas all are pitching a more lightly taxed home for CME, but traders and technologists are weighing the cost of hooking up to a new and potentially far-flung exchange facility, and the prospect of quieter bars in Chicago's financial district.

"There are network effects in the trading community," said Jeff Carter, a private investor and former CME board member based in Chicago.

"A bunch of traders can go to Ceres and sit around and talk, even the high-frequency guys," Carter said, referring to the noisy bar that sits outside CME's Chicago trading floors. "Those are hard things to quantify for CME," he said, adding that the company must ultimately act in the best interest of its shareholders.

CME's Duffy has said that an out-of-state move would involve shifting Globex, the company's electronic trading platform, as well as the clearinghouse that handles trades and holds customer collateral. The company's headquarters and related staff would also move, as well as banking services.

A spokeswoman for CME declined further comment on any relocation.

Beyond vacating corporate headquarters on Chicago's Wacker Drive, CME confronts a trickier departure from its 428,000-square foot data center in suburban Aurora, Ill. The facility houses not only CME's exchange systems but those of the automated trading firms and banks that rank as its heaviest-trading clientele.

Since the beginning of 2007 hundreds of millions of dollars have been sunk into building the unit and its capacity for customer systems, and replicating the data center in another state would require CME to outfit a new structure and connect clients via new electronic pathways before any trading could kick off under a lower-tax regime.

Such an effort could take about a year, said Mark Casey, president of network solutions company CFN Services.

"Those that have made infrastructure investments in the Aurora site, particularly the fiber-based carriers, would not be excited about a move, but most can handle it and with that they would recognize the site would ultimately attract another data center operator and therefore their investment would not be stranded," said Casey. CME could potentially recoup some of the cost by selling the facility, he said.

The story could be different for high-frequency trading firms that spent heavily to access a fiber corridor forged between New York and Chicago by Spread Networks LLC, aimed at delivering market information to computer-driven strategies as fast as possible. If CME chose Florida or Texas, some of that investment could be stranded and another race may begin to create a higher-speed information pathway to its new home.

Observers have seen suitor states extending subsidies to defray some of the technology relocation, as well as the expense of hiring moving vans and logistics specialists to shift CME's staff, some 2,000 of which work in the Chicago area. United Van Lines LLC, which handles corporate relocations, charges rates based on how heavy goods are and how far they need to go, according to spokeswoman Melissa Sullivan.

"Typically we see companies of this size plan a move six months to a year in advance," she said.

CME's physical trading floors would continue to anchor Chicago's financial district, and with 85% of CME's volumes now electronic, few expect the city's cluster of proprietary trading firms and commodity fund managers to immediately follow CME to another state.

But eventually customers may seek to maintain the "face time" they have had with CME staff and executives in Chicago, adding new positions elsewhere or ultimately moving some their own operations, said Anthony Dostellio, recruiting manager with executive search firm Objective Paradigm.

"One of the reasons we're based in Chicago is because a lot of our clients are, and our clients are here partly because CME is here," he said. "Over time a lot of firms that are here and grow and create jobs might find it easier to be close to where the hub is located."

Matt Haraburda, president of Chicago-based XR Trading LLC, said few industries are as anchored to a specific company -- and city -- as the U.S. futures market is to CME and Chicago.

"The CME leaving Illinois would certainly give less of a reason for trading firms to exist here," he said.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

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