Responding to the proposed merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, James Grant (editor of Grant’s Interest Rate Observer) wrote a great op-ed piece for the Wall Street Journal called, provocatively enough, Innovate or Die. Innovation, quite simply, is the key to future success within the financial services industry.

Mention the Chicago Merc today, and you probably think of sophisticated financial derivatives and financial innovation. Yet, the Chicago Merc actually started out life in 1898 as the much humbler Chicago Butter and Egg Board, trading contracts on commodities such as butter, eggs and onions, Suffice it to say, the Chicago Merc in those days was well on its way to becoming a “relic of the Old Economy.” By the 1950s, it was left with a single type of contract to trade - the egg contract - that was itself the subject of constant manipulation by traders. So what happened? The Chicago Merc decided to innovate its way to success:

“They picked innovation. The same government that had stamped out the butter and onion contracts proceeded to create new opportunities through inflation and monetary turmoil. The end of the Bretton Woods system of fixed exchange rates opened new vistas in currency trading. The Merc seized them as it more recently did the chance to develop markets in interest rates and equities…

The Merc didn’t burst when the Nasdaq bubble did. Today, it is generating over $1 billion in annual revenues, up from $210 million in 1999. Its stock market capitalization tops $17 billion, a nice, neat 17-fold appreciation in value for the seat holders in less than seven years… Properly, the CME Group is the envy of the New York Stock Exchange and of brokers and dealers worldwide…”

[image: President Bush at the Chicago Merc]