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Will CME Move out of Illinois?

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At the CME shareholder meeting last week, there were a lot of questions asked after the presentation by management.  I stood up and asked the question everyone is still yammering about today;  ”Since other big Illinois companies have received relief from the state of Illinois on the increase in corporate taxes, what is CME doing?  And if they don’t get relief will you move?”

Terry Duffy answered the question.  Unlike a lot of reporters in the room, I have known Terry for a number of years, since at least 1992.  Maybe longer, but on the floor it’s hard to keep track of years.

The reason I tell you the following is not to puff up anyone.  But, CME is a very unique company from a shareholder perspective.  70% of the shares are owned by faceless institutions. 30% by traders who operate from a different code than 99% of the world’s business population.

Here is what I know about Terry Duffy.  He is honest.  He doesn’t pull any punches.  He doesn’t try to put one over on you.  When he says something, he means it.  When he laughs, it’s not an idle laugh, he really means it.  When he gets ticked off, he is really ticked off.  Nothing is done for show.

Because he is so honest, he became a great relationship builder.  People on the floor trusted him.  People in Washington trust him too.  It’s not often in business that you meet a person that thinks “There word is their bond.”, but that’s how we operated on the floor.  That’s also the code that many of us operate with each other.

I also know this,  he is street smart. He understands competition.  He is competitive himself.  Virtually every trader in a pit is competitive.  He knows when he is playing cards at a disadvantage, and knows when to press his upper hand.

CME has been dealt a hand that makes it competitively weak by Illinois politicians.

Here is how Duffy answered the question.  Paraphrasing, “We are working through intermediaries to try and get relief.  We are exploring the costs and benefits of moving.  CME is a virtual company.  We don’t need to be in Illinois.”

He’s right, and his logic is correct.

In the microeconomic analysis that CME must do, each positive effect of moving out of the state also has a corresponding cost.  It’s impossible to do a net present value analysis, but here are some ideas of what CME will look at.  Some are really basic.  How does the lease costs, building costs, and movement of employee costs figure in. CME has roughly 2400 employees.  It’s roughly 107k per employee to move.  I don’t know how many employees they have that would need to move, but it’s probably close to 2000.

A move would close the trading floors, which saves CME huge money, maybe 30-50k per year.  They could open a new trading floor in the new location for options pits only.  The build out and cost of operating that won’t be cheap.

They will need to relocate all the servers and computer equipment they have.  They could either sell the existing ones and buy new ones, or simply truck them off.  Either way, they will incur some cost.

If CME were to move south, their salary structure might be impacted, because the cost of living is cheaper.  They could save some money on human capital costs.

CME doesn’t need to be in Chicago anymore.  The trading world is electronic.  Physical presence means nothing.  Co-location is where it’s at.

If I were CME, here is what I would do.  I would arrive at the exact cost number, and then I would go shopping.  There is a good chance that another state will pass a bill to subsidize the move.  Suppose the cost is 500 million.  You think Texas or Tennessee wouldn’t pass a bill giving CME subsidies of that kind to move?  Dallas? Nashville? Memphis?  Why wouldn’t they open their arms and welcome the entire trading community?

If CME moves, the entire financial apparatus moves with it.  The HFT guys will move.  Traders will move.  It’s not just CME.  There are huge network effects in the trading business.  Chicago has benefited for 150 years from those network effects.  The city, and state, would not be what it is without the exchanges.  Illinois just as easily have been Arkansas.

CBOE will also go, so add those numbers into your analysis.  CBOE should be doing the same analysis as CME.  They could do a package deal and really improve the business climate in a city overnight.

The statements by Executive Chairman Duffy shouldn’t be taken lightly.  It’s not political posturing or fluff.  He means what he says.  His word is his bond.

The question is, are politicians in Illinois listening?  I hope they think they are calling a bluff.  Because they are about to be hit with a royal flush.

 

 

Read more at Points and Figures


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