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Students Recommend Changes at Chicago Mercantile Exchange

After a yearlong focus on the futures trading industry in Chicago, GSB students recommended the Chicago Mercantile Exchange promote Chicago’s prominence in the trading industry, retrain floor traders as entrepreneurs, and back tax incentives that would redirect earnings to entrepreneurial activity in Illinois.

Students enrolled in the course Exploring Entrepreneurship outlined their recommendations at a conference May 2 at the Chicago Mercantile Exchange. Their work included analyzing trends in the futures trading industry and conducting interviews with leaders as well as small business owners.

George Stein, a student in the Evening MBA Program and a trader at the Merc, said, “This industry is essential to Chicago and Illinois. It’s in the interest of everyone to ensure that it’s safe and secure for the future.” Toward that end, students made six recommendations.

1. Market and promote Chicago’s global prominence in the derivatives trading industry. “Chicago isn’t as visible as it should be,” asserted Jason Starr, a first-year student in the Full-Time MBA Program. Except for such publications as Crain’s Chicago Business, the media don’t cover it, he said. Even as the trading model developed at the CME is duplicated by others, people don’t know about the trading industry in Chicago.

“We need to get Chicago and its ecosystem higher in people’s minds,” Starr said. “This is the epicenter; the public should be more aware of the innovation here.”

2. Retrain and redeploy the floor traders into the entrepreneurial fabric of the community. Now that traders have come out of the pits and into the 21st century marketplace, they need to educate themselves to use the industry’s advances. “New students have training,” said evening student Michael Busch, an independent trader on the Chicago Board of Trade. “Older students don’t.”

Megan Morgan, a second-year student in the Full-Time MBA Program, said there is a new role for traders—that they no longer have specialties but are becoming generalists with access to multiple markets including equities, options, foreign currencies. “It’s all electronic, which makes the market more complex and people more sophisticated,” she said.

To accommodate these changes, Busch suggested the GSB offer courses at Gleacher Center in downtown Chicago aimed at professional development for traders. He also called for alliances between new students and experienced traders that could lead to entrepreneurial opportunities. “We need leaders to tap the resources at schools,” Morgan said. “That’s where there is innovation and new talent.”

3. Create tax incentives to direct the wealth generated in this industry to other entrepreneurial sectors of the Illinois economy. Businesses have benefited from tax incentives such as the orphan tax credit, said Brett Ladendorf, a student in the Evening MBA Program who also works at the independent futures brokerage firm, R.J. O’Brien and Associates. “That created activity. Now we have an opportunity for tax incentives to promote other businesses.”

4. Continue to develop locations in the Chicago area that have the technological infrastructure for trading and offer a congenial and conducive atmosphere for traders. Due to the advent of electronic trading and technology that provides access to markets around the world, “Trading doesn’t have to be in Chicago anymore,” pointed out Steven Rosen, a student in the Evening MBA Program who works at options market maker PEAK6 Investments, LP. “The question is how to keep talent in this city.”

The answer, he said, is to make sure the South Loop is a destination. “The technology is here. The history of the futures and options industries is here. We need to leverage that to attract businesses,” Rosen said.

5. Create a private and public sector leadership committee to monitor key indicators of the trading industry in Chicago and make ongoing recommendations as necessary. “The changes in the industry are phenomenal,” said Stein. “No other time in history compares. There is record buying and more participants in the market than ever.” Stein said this alone gives market leaders an incentive to keep interests aligned and secure the industry. “Working together, we can reach the horizon,” he said. “This is not the end; this is the beginning.”

6. Strengthen educational programs that produce highly skilled experts for the futures trading industry. “We challenge industry leaders to work with the academic community to develop curriculum that will meet their needs,” Morgan said. “[They’re] calling for more educational programs; we need to make sure that what’s taught in schools is aligned with the future.”

Craig Donohue, CEO of the Chicago Mercantile Exchange, said the students’ study is particularly timely because of the industry’s recent progress. He agreed that few other industries are evolving as quickly. For example, since the CME went public in 2002, Donohue has led the Merc not only into the international marketplace and the electronic age, but also toward a trading volume that has quintupled over the last five years.

One of the challenges of the transition has been to face the risks in a balanced way. “We incorporated our members in the change process,” Donohue said. “We tried to integrate technology in ways that would enable people to reinvent themselves.”

Now Donohue sees new avenues for education in the industry. “It’s an increasingly complex equation because of technology and the global market,” he said, but there are opportunities in electronic technology and risk management. “A good regulatory environment is especially important,” Donohue said. “We need sound regulatory and tax environments to nurture entrepreneurialism. That’s important to the industry.”

Read the students’ paper on the "Exploring Entrepreneurship: The Chicago Futures Trading Industry". (PDF)

Carmen Marti