Chicago has been taking it on the chin for a few years, so we felt it was time to go on offense and review why we chose to make the City of Big Shoulders our corporate home.
We decided to start our business in Chicago for three strategic reasons:
- Chicago’s financial background as a hub and center of expertise for the futures business.
- The ecosystem of supporting businesses, exchanges, and infrastructure that background has created and sustains.
- The strategic location and connectivity Chicago provides.
Financial Hub and Center of Expertise
Chicago established itself as a financial center when the Chicago Board of Trade (CBOT) was set up in 1848(1). The idea for the CBOT came about because by that time Chicago had begun to establish itself as a major transportation hub connecting the agricultural supply of the Midwest to the demands of the East. Generally speaking, products flowed into Chicago via the railroads and out via the Great Lakes.
At first, traders traded ‘forward’ contracts on the products they brought into Chicago, most notably corn, wheat, and soybeans. A forward contract, or simply a forward, is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract(2).
Forwards satisfied the needs of farmers to guarantee a price on their future crop, but the contracts were bilateral, so when either party defaulted the contract fell apart.
As a first step toward the novation of contracts, in 1859 the state of Illinois granted a corporate charter to the CBOT, allowing it to self-regulate its members and standardize the grading of contracts for delivery(3).
(1) Chicago Board of Trade – Wikipedia
(2) Forward contract – Wikipedia
(3) History of the CFTC | CFTC
Finally, in 1865 the CBOT formalized trading and margin procedures which saw the bilateral ‘forward’ contracts evolve into exchange-listed futures contracts(4).
The Chicago Butter and Egg Board, which eventually evolved into the Chicago Mercantile Exchange (CME), was founded in 1898. However, it wasn’t until 1972, when the CME first listed FX futures(5), that the CME truly found its footing.
The 1974 passing of the Commodity Exchange Act transferred oversight of the futures industry from the Department of Agriculture to the CFTC, a new independent government agency, which allowed the industry to expand beyond its agricultural roots(6). Meanwhile, the CME’s success with the FX futures combined with a change in oversight, and coinciding with Nixon taking the US off the gold standard, provided the impetus for both Chicago exchanges to broaden their reach with more financial futures contracts and in doing so, bring powerful risk management tools to our nation’s economy.
While other exchanges listed futures products, including wheat in Kansas City and Minneapolis, and coffee, sugar, cocoa, cotton, and most notably oil in New York, it was Chicago’s commitment to financial futures and the evolving and innovative markets they listed that ultimately made Chicago the hub of the futures industry. Not to over speculate, but if Dr. Sandor(7) had stayed in New York and Leo Melamed(8) hadn’t found his way to the trading floor with the ‘law firm’ of Merrill, Lynch, Pierce, Fenner, & Smith, the financial landscape of Chicago would likely be very different!
Let’s not also forget that the CBOT established the Chicago Board Options Exchange (CBOE) in 1973(9), which brought more talent into the financial services industry, and in doing so propagated Chicago as a sophisticated financial center globally.
Ultimately, this industry evolution from a primarily agrarian and commodity-focus to a multi-faceted and multi-dimensional product focus led to one thing – growth. At their height the five main trading floors in Chicago employed thousands of people, not including the back office, admin, and support staff that worked in the 169 futures commission merchants (FCMs), aka brokers, registered in 2002(10).
As electronic trading, primarily facilitated by CME’s Globex platform, but pushed along by the UK’s LIFFE and Germany’s EUREX, established a foothold, the independent software vendors found a steady and reliable pool of staffing talent by looking to the trading floors.
(5)the-birth-of-fx-futures.pdf (cmegroup.com)
(7)Richard L. Sandor | University of Chicago Law School (uchicago.edu)
(9)Chicago Board Options Exchange – Wikipedia
(10)Historical FCM Reports | CFTC
The transition from floor to screen also translated into ever higher trading volumes, as trading hours expanded, costs came down, and transaction speeds increased.
Ultimately, the industry continued to grow, but consolidated at the same time as firms became more efficient and competitors dropped out, got acquired, or merged. As an example, Goldman Sachs was the largest U.S. FCM in December 2002 with roughly $6 billion in customer-segregated (seg) funds. The most recent commitment of FCMs report shows that Goldman Sachs has roughly $33 billion in seg funds, and is the second largest FCM behind JP Morgan, which has $40 billion in seg assets.
Today, the ecosystem created by the trading floors has been replaced by the exchanges themselves, the sixty-four FCMs currently registered, the prop trading groups that expanded past their presence on the trading floors, and the vendors and providers that service them.
The Ecosystem of Supporting Businesses and Infrastructure
While LaSalle Street has lost some of its former glory as remote work has matured and electronic trading has become the norm, it’s still anchored by the Chicago Board of Trade building at one end of it. Nearby is the CBOE and the Chicago Federal Reserve.
Directly across the street sits the Federal Reserve Bank of Chicago, one of the twelve Federal Reserve banks that help make up the Federal Reserve system. The Chicago Fed was founded in 1914 and has served the Seventh Federal District ever since(11).
The myriad of other financial institutions, large and small, dot the Lasalle Street corridor and the greater loop, creating an ecosystem for the Chicago financial sector to flourish.
Concurrently, the exchanges and their trading floors that have called Chicago home for the past one hundred and fifty-nine years created their own networks. In parallel, a great majority of the sixty-four registered FCMs are either headquartered or maintain a significant presence here because originally they had to be located in close proximity to the exchanges and their matching engines.
Jump Trading is (most likely, though likely no one is certain) one of the largest proprietary trading groups (PTGs) in the world, and it’s based here in Chicago because its founders got their start on the Chicago trading floors. DRW, which reflects the initials of its founder, Don Wilson, is another PTG that has steadily grown and been powered by homegrown talent.
The National Futures Association, the designated self-regulatory agency for the industry, was created by the CFTC (which is headquartered in Washington, DC) but set up its headquarters in Chicago because this is where futures business gets done.
Historically, the banks, FCMs, PTGs, and regulatory agencies have all been instrumental in fueling the engine of the industry and providing talent for new ventures and initiatives(11).
(11)Federal Reserve Bank of Chicago – Wikipedia
Also, not to be forgotten is the ready access to capital these entities have provided over the years. Jump and DRW were already mentioned above, but let’s also remember the CBOE was originally spun up by the membership of the CBOT, while long-time innovator Trading Technologies was owned and operated for decades by an ex-CBOT floor trader.
Strategic Location and Connectivity
Remembering that futures originally found a home in Chicago because of its centrality for the trans-shipment of commodities from West to East, Chicago remains a central hub for the trans-shipment of people and information today.
Physically, Chicago’s O’Hare International Airport supports direct flights to 248 destinations in 46 countries(12). O’Hare was the 9th busiest airport in the world in 2023, and the 5th busiest in the US(13).
From a data and telco perspective, there are currently 129 data centers listed in the Chicagoland region, and Illinois ranks 5th in the sheer number of data centers among the states(14). Not only does Chicago host a high proportion of data centers, but because of the requirements of the exchanges and the prop trading community, it hosts some incredibly fast and resilient global connectivity as well.
Finally, let’s not ignore the ‘soft’ factors that make Chicagoland a good place to call home:
- Affordable when compared to other major metropolitan areas such as New York, San Francisco, and Los Angeles(15).
- Temperate, with an average summer temperature of 83 F and 22 F in the winter(16).
- Ready access to arts, sports, and entertainment, with six professional sports teams, world-class museums, theater, music, and performing arts groups.
- A steady supply of hungry young professionals with six major universities located within the Chicago metro region.
In Summary
Chicagoland is MetroTrade’s home base – it has a ready supply of everything we need, it’s a nice place to live and work, and has a long history and experience with the type of business we want to do.
The late John Belushi and Dan Aykroyd said it best, “Sweet Home Chicago!”
And that’s why we did that.
(12) Flights from Chicago (ORD) (flightconnections.com)
(13) List of busiest airports by passenger traffic – Wikipedia
(14) USA Data Centers (datacentermap.com)
(15) Cost of Living Calculator | Chicago, IL vs. New York (Manhattan), NY – NerdWallet
(16) Chicago Climate, Weather By Month, Average Temperature (Illinois, United States) – Weather Spark