Death of pit trading looms

CHICAGO -- Craig S. Donohue rose through the ranks of the Chicago Mercantile Exchange as a lawyer, becoming chief executive officer without trading contracts on the floor. Now he has made it less likely that a successor will ever work in the pits.

The exchange's purchase of the Chicago Board of Trade for about $8 billion caps his three-year effort to link the two exchanges.


As a result of the deal, the Chicago Mercantile Exchange Holdings Inc. will close its trading floor and move about six blocks to the Board of Trade building.

"That old model of trading is on its death bed now, and soon it'll be completely buried," says Daniel F. Brophy, a Board of Trade shareholder and former director who has traded grain futures for more than 20 years.


The Mercantile Exchange's takeover of the 158-year-old Board of Trade could accelerate the switch to screen-based trading from the traditional "open outcry" hand gestures and shouts from the floor, traders say.

Donohue, 45, began forging links with the rival Board of Trade in 2003, when the Mercantile Exchange took responsibility for guaranteeing the board's trades. The agreement boosted the Mercantile Exchange's revenue by $55 million, or 10 percent, in the first year.

"Electronic trading is cheaper, faster and better," says Ray Cahnman, a Board of Trade shareholder and trader. "The quicker they can get rid of the pits, the more profitable this'll be."

Futures contracts, agreements to buy or sell a commodity or security at a set date and price, are traded by hedge funds, farmers and speculators.

The Mercantile Exchange lists Eurodollar contracts and futures on weather, housing, hogs, cheese and the Standard & Poor's 500 stock index. The Board of Trade has contracts on soybeans, wheat, ethanol, gold, Treasuries and the Dow Jones industrial average stock index.

The Board of Trade's most widely traded contract, 10-year Treasury futures, is dominated by screen traders. Futures for the 10-year-note are traded electronically 94 percent of the time, outpacing the 23 percent for wheat. About 70 percent of trades at the Mercantile Exchange are made electronically, up from 41 percent three years ago.

"Pit trading is dwindling, and with this deal it will continue to shrink," says Mary M. McDonnell, chief executive at Geneva Trading USA LLC and a former senior vice president in charge of electronic trading at the Board of Trade. "I still think we're going to see it in some form or another for another 10 years."

Both exchanges still offer floor trading. The Board of Trade's financial floor, which opened in 1997 and covers 60,000 square feet, can be reconfigured to accommodate the Mercantile Exchange's markets, said Bernard W. Dan, chief executive of CBOT Holdings Inc., the corporate name for the Board of Trade. He won't comment on whether it would speed the demise of trading pits.


Donohue's spokesmen didn't return phone messages seeking comment.

Donohue studied law at John Marshall Law School in Chicago and received a master's degree in business administration at Northwestern University's Kellogg School. He joined the exchange as a staff lawyer in 1989 and became associate general counsel in 1995. He went on to oversee the Mercantile Exchange's market regulation division in 1997 and business development in 2000. In 2002, he was promoted to executive vice president.

After becoming chief executive officer in January 2004, Donohue more than doubled the exchange's annual profit, to $307 million in 2005, from $122 million in 2003. The gains were achieved in part through acquisitions in the United Kingdom and elsewhere, expanding customer outreach in Asia and branching out into new fields, including the $17 billion-a-day oil futures market.

Under Donohue, the exchange has added functions to its electronic system to increase options trading, and raised the number of futures contracts traders can buy or sell in block trades by as much as 60 percent.

Since January 2004, Mercantile Exchange shares have gained an average of 103 percent a year, assuming reinvestment of dividends. Donohue was paid $2.99 million last year, including a salary of $700,000 and a $951,510 bonus. In April, the company raised his annual base salary by 21 percent, to $850,000, in a three-year extension of his contract.

"We're expanding very rapidly in both Europe and in Asia in particular, and our combination really gives us a tremendous growth platform," Donohue says.


Brophy, the grain trader, says he expects Mercantile Exchange shares to rise $700 to $800 in the next couple of years as the Board of Trade acquisition boosts trading volume and profit. The shares rose 2.6 percent yesterday to $516.50.

"We're all glad to be hopping on the Merc bandwagon," said Brophy.