Patrick H. Arbor relaxes by scaling peaks like the Matterhorn, Mount Kilimanjaro, and Mount Rainier. On the job as chairman of the Chicago Board of Trade, he faces down some real challenges.
Indeed, his description of his hobby might just as easily apply to his job, which increasingly requires him to balance the interests of large banks and brokers against those of the independent traders that once dominated the futures exchanges.
"The only way you can define success," said the 31-year veteran of the soybeans and financial futures pits, "is if you get up and down safely."
Few actions in recent years have created as a much of a furor among the groups that share the exchange as last year's staff decision to raise trading fees for nonmembers. "It wasn't exactly the most popular proposition I've introduced," said Mr. Arbor during a break at this year's Risk Management Conference in West Palm Beach, Fla.
Faced with a growing insurrection among a close-knit group of bank-owned and brokerage-owned futures commission merchants, he helped engineer a compromise. In the end, the exchange agreed to keep the current trading fees of $1.10 a contract, and to form a strategic initiatives committee with its crosstown rival, the Chicago Mercantile Exchange. The committee would "examine the potential for common initiatives," including a possible merger, according to a joint press release.
The power struggle highlights futures commission merchants' demand for a greater say in the governance of the exchanges. The reason is that these institutions run a high-volume, low-margin business.
"We're doing business at cost plus," said Anthony McCormick, president and chief executive of Chicago-based Harris Futures Corp., a subsidiary of Bank of Montreal. "And the plus is not that much."
According to one estimate, large traders such as Harris are responsible for about 25% of the nearly 211 million contracts that changed hands at the Board of Trade last year. Having invested hundreds of millions in the clearing corporation, clearing and exchange fees, and exchange memberships, these institutions are demanding that the Board of Trade and other futures exchanges modernize and join forces to cut costs.
"Executing trading activity has gotten cheaper and faster in a variety of different marketplaces," said Rick McVey, managing director J.P. Morgan Futures and one of those leading the fight for change at the exchange. "In order to compete for that customer business, the Board of Trade or any other exchange has to continually find ways to lower the costs of trading."
The conflict between large financial institutions and independent traders at the exchange is not new. For nearly 140 years the exchange was the domain of agricultural processors.
However, since the first government-issued futures contract on mortgage pools was traded more than 20 years ago, financial futures have grown in stature and influence. Today, trading volume in financial contracts dwarfs that of agricultural products by a 3-1 margin.
What's needed, say the banks and brokerages, is a more modern exchange. They want more technology introduced into the trading process, including using an electronic order entry system to replace the 100-year-old tradition of having runners take orders to and from the trading pits.
Mr. Arbor said the institutions are pushing the exchanges to consider common systems.
"They are saying to us, 'Why can't we have one common back office system so that we don't have one system at the Board of Trade, one system at the London International Financial Futures Exchange, and another system at the Mercantile Exchange,'" Mr. Arbor said. "The common theme is to reduce costs, to make it easier for them to be more efficient."
Likewise, the exchange is moving to create links with other exchanges - like the Board of Trade's tie to the futures exchange in London - to help reduce costs.
The London exchange was a model for the Board of Trade, said Mr. McCormick. Started by large financial institutions, the London exchange has a history of being a low-cost, user-friendly provider, he said. It makes no distinction in trading fees between members and nonmembers. The Board of Trade gives members a $1.10 discount per contract.
"Customers don't always have to do their risk management business on a listed exchange," said Mr. McCormick. "It's important that the exchanges don't just focus on what's going on in Chicago."
To accomplish this, the exchanges will have to overcome their traditional rivalries and recognize where the competition - and business - is coming from.
"Our competition isn't so much in the exchange-traded derivative area between the exchanges as much as it is with the over-the-counter market," Mr. Arbor said, adding that "we like them" because they complement the exchange's business.
But Mr. Arbor has had do all this at the same time the exchange was suffering a 4% overall decline in trading volume last year. After a record- breaking year in 1994, the exchange also decided to construct a $182 million state-of-the-art building next to its existing complex at the foot of LaSalle Street.
In fact, it was the five-year mortgage on the new facility that ultimately led to the decision to raise trading fees for nonmembers. As part of the compromise over the fee structure, Mr. Arbor said the exchange hopes to extend the term of the mortgage to 10 years. The exchange's membership will vote on the extension Thursday.
Still, leaders of the financial institutions' group understand the position Mr. Arbor is in.
"It's a very difficult position as chairman of the exchange to manage the seams of a very diverse membership population," said Mr. McVey. "Pat has worked very hard to do that."
The measure of success in trading - as in mountain climbing - is quick and easy to see. But it will likely take years for Mr. Arbor and the exchange to measure the success of plans introduced today. And it will likely involve more challenges from institutional members.
