Later, new and different threats confronted the established exchanges, which brought about wrenching change (see “In a flash,” above). The CBOT, CME, and Nymex had to (and did) face up to competitive threats resulting from electronic trading. In the case of Nymex, the Exchange had to face up to pressure from the upstart IntercontinentalExchange (ICE). William Kokontis, a veteran of both the Chicago Mercantile Exchange and the Commodity Futures Trading Commission, summarized the tectonic shifts: “Just as board trading inevitably gave way to open outcry and pit trading, the latter inevitably gave way to electronic trading.”
Melamed discussed the constant worries concerning Chicago’s continued competitiveness with Futures. He said: “Without electrification we were destined to remain either very small, or someone really big would take it away from us.”
However, the battle to build an electronic trading engine was tough and Melamed realized competitive challenges would come too quickly for a member organization to respond efficiently. He wrote, “The only way to prepare … [the CME] for the twenty-first century” was to demutualize; a member-driven organization would be too slow in its decision-making. The CME went public in 2002, followed a few years later by the CBOT and then Nymex.
With lightning-fast execution in the new electronic markets, a “whole new world of very short-term algorithmic trading [opened up] to speculators in the [futures] market[s],” wrote Chicago trading expert George Dowd. Product innovation is arguably now moving “from [the] exchanges to electronic trading firms, which develop their own algorithms rather than [relying] … on the exchanges to create new instruments,” explained Weitzman in an article.
And the innovation by Chicago’s proprietary trading firms continues, of necessity. Alex Brockmann of TradeLink Capital explained current trends to Mark Melin in the 2013 Opalesque Round Table: “What I have noticed is that the profitability of the prop trading businesses has actually been declining since about 2009, and what you see as a consequence is that some proprietary trading firms are edging toward asset management as a way to earn something from the infrastructure and the intellectual capital they have developed.”
Transformations by exchanges are continuing as well, of necessity. For example, in 2012 CME Group announced plans to establish a European derivatives exchange in London. Explained an Exchange official: “The more we have invested in our global infrastructure, the more we have realized that there are customer acquisition opportunities by creating regional access to our services,” as reported by a Dow Jones writer.