By Nina Mehta

Former Speaker of the House Tip O’Neill once said, “All politics is local.” If you don’t believe it, just take a look at the current sorry state of the Chicago Board of Trade. At a time when the CBOT should be envisioning the future, it seems to be splintering along the fault lines of age-old turf battles. As a result, exchange-watchers have been treated to an unprecedented airing of dirty laundry.

The event that brought some of the long-simmering conflicts to a head was the recent scrappy fight between David Brennan and Thomas Donovan. Brennan, a third-generation soybean trader, and his core group of supporters started bumping heads with Donovan, the exchange president and CEO, soon after Brennan defeated Patrick Arbor last December to become the CBOT chairman. Arbor and Donovan had been longtime allies.

One of Brennan’s first moves was to help axe the pending technology-platform alliance with Eurex that had been carefully assembed by his predecessor and had received board approval. Shortly afterward, he also decided it was high time to toss Donovan from his 17-year perch as CEO.

On April 14, Brennan asked for Donovan’s resignation—without board backing. The 27-member board took up the gauntlet, swiftly limiting Brennan’s ability to act on his own and directing him to make a public statement of “regret” about recent events. Like a schoolboy who had been disciplined, Brennan on April 19 pledged to “demonstrate that Tom and I can work together.”

The board, whose support has leaned toward Arbor and Donovan, subsequently directed Brennan to reopen alliance talks with Eurex. The board allegedly threatened to try to remove him from the executive committee, which plays a crucial role in shaping board policy decisions. Backed into a corner, Brennan did as he was told. A month or so later, on May 27 when alliance plans between the CBOT and Eurex were announced, Brennan gushed, “Our thorough analysis demonstrates [that] an alliance with Eurex is the best business alternative for our exchange...The alliance is a central pillar in our strategic plan to keep the CBOT a global leader in any trading venue.” Never mind his earlier dark view of the alliance—and the fact that the terms of the partnership had not changed significantly.

Donovan, praising the Eurex alliance, made clear what he thought of Brennan’s about-face: “Our members and customers told us what they want, and the Board acted quickly and decisively to keep their business.” The full membership of the Board of Trade voted on the alliance on June 24. At the time of this writing, the membership was expected to support the alliance.

$1.4 million man

After the board’s directive to kiss and make up, however, all was not well. In mid-May, the board approved contract extensions and raises for a number of senior executives, partly, say some, to offset the damage caused by Brennan’s failed palace coup.

But not all board members were happy. On May 23, board member Daniel Brophy, an independent trader appointed to the board earlier this year by Brennan, lambasted “our ‘Board process’” for being rife with deliberate ignorance of what he described as Donovan’s poor performance—and let loose some numbers. Donovan’s salary, he revealed in a letter to board members, was $1.4 million. The executive staff raises and contract extensions totalled $10 million, by his calculation. According to a Securities Week article on May 31, the raises and contract extensions were for Donovan; Patrick Catania, executive vice president of marketing; Fred Grede, executive vice president of strategic planning; and Carol Burke, executive vice president and general counsel.

Brophy even went so far as to name the source of at least some of his information. “Having nothing in writing to which I could refer,” he revealed in his letter, “I had to pry from Governer [sic] Thompson the details about who was receiving a raise; how much that employee was paid currently; how much that employee would receive in a raise; what would be [the] resulting total compensation; and what would be the expiration of the proposed contracts.” Former Governor James Thompson, a 14-year governor of Illinois, had been brought on the board as an outside director by Donovan in 1990. Compensation proceedings at the CBOT are notoriously sub rosa, and members of the finance committee and human resources committee privy to those discussions are prohibited from discussing them.

“The entire board process is more reminiscent of my image of Chicago boardrooms in the 1920s, or City Hall in the 1960s, than corporate America in the 1990s.” —Daniel Brophy

Winding down his letter, Brophy noted that “the entire [board] process is more reminiscent of my image of Chicago boardrooms in the 1920s, or City Hall in the 1960s, than corporate America in the 1990s.” He pointed out that some floor members do not trust the board, adding that “I sympathize increasingly with that distrust.” (For the gory details of this letter, see www.roonet.net/forum/default.asp.)

Veiled threat

Through all this, Eurex has stood by like a patient lover. Although the high-level infighting at the Board of Trade clearly affects whatever transpires with Eurex, Eurex officials refuse comment. But according to a report in Handelsblatt, a newspaper in Dusseldorf, Germany, Eurex has been quietly planning to seek an operating license for Nadex, a new exchange to be launched in the United States to trade futures and options on U.S. debt. News of Nadex—clearly a threat to the CBOT, given what happened at Liffe last year—may well have affected the Board of Trade’s preliminary decision to reenter a deal with Eurex.

In addition, Eurex superseded the CBOT in March as the largest futures exchange in the world and has increased its lead in the months since then. A source at the Board of Trade notes that Eurex’s leap ahead of the CBOT served as a wake-up call for Brennan and his core contingent of supporters. “The one thing these guys seem to understand is volume,” says the source. “When so much volume shifted so fast to Eurex, it jolted people. What happened, it seems, is that the core group of locals that opposed the alliance grew up.”

Others at the CBOT, however, aren’t ready to concede that any sort of maturation process is underway. Gil Leistner, a member of the CBOT and CEO of The Leistner Group LLC, a Goffstown, N.H.-based consultancy, says, simply, that the exchange is going out of business. “It’s an institution that’s dying and it’s exhibiting the five stages of death one by one,” he says. The five stages are denial, anger, bargaining, depression and acceptance of death. According to Leistner, a large part of the CBOT membership is currently in the anger and bargaining phase. “Part of the anger and bargaining is [reflected in] the rage at Donovan,” he points out. “You hear people saying, I know electronic trading is coming but just give me three more years. Everything that’s been going on is related to that. But what the Board of Trade misses is that its business model is collapsing in the face of new technology. Killing the CEO will not change that.”

In Leistner’s view, linking with another exchange at this point is like one monastery deciding to link with another to protect the interests of their scribes in the face of Guttenberg’s printing press. The problem currently being faced by established exchanges, he says, is that, excluding copyrighted product such as the S&P and Dow, “they have no monopoly on product anymore—not even a regulatory one, given recent actions by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Justice Department.” The real threat facing the CBOT is therefore not screen-based vs. floor-based trading, or even Eurex, which he describes as “more of a natural competitor than a natural ally,” but the possibility of an EBS-type exchange run by some of the CBOT member institutions. Such an exchange would disperse the trading floor across the member firms, he explains, reversing completely the process that led to the concentration of people at exchanges and on exchange floors after the telegraph was invented.

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