By Alexander Osipovich
In early October, CME Group Inc. Chief Executive and Chairman
Terrence Duffy met with one of his top lieutenants and set in
motion a risky plan that the exchange operator had been secretly
developing for two years: launching a futures contract based on
bitcoin.
That plan was unveiled this week, and represented a big step
toward bringing the highly volatile digital currency into the
financial mainstream. Bitcoin, which only started trading in 2009,
has long been a niche market and continues to be tarnished by its
association with illicit activity.
Thanks to Mr. Duffy, it now has the blessing of the $47.6
billion global exchange giant. If the Chicago-based firm can
establish a viable bitcoin futures market, both Wall Street banks
and retail investors would be more likely to trade the digital
currency, many market participants say. CME plans to list bitcoin
futures by the end of the year, subject to regulatory approval.
CME's announcement is the clearest move yet that the financial
industry is starting to warm up to bitcoin. It came just weeks
after Goldman Sachs Group Inc. said it was considering setting up a
trading operation for digital currencies. CME's smaller crosstown
rival, Cboe Global Markets Inc., is also seeking to launch bitcoin
futures, it said in August.
If digital-currency futures take off, Mr. Duffy would add
another major accomplishment to his tenure at CME, though he risks
harming the company's reputation should the contract flop or
generate controversy.
A former hog futures trader who got his start in the frenzy of
the Chicago Mercantile Exchange's trading pits, he now oversees a
sprawling exchange empire that runs a dizzying array of markets,
from crude oil to gold to stock-market futures. As CME's chairman
since 2002, Mr. Duffy helped turn the firm into the world's largest
exchange operator, spearheading tie-ups with the Chicago Board of
Trade in 2007 and the New York Mercantile Exchange in 2008. He also
handled the delicate task of persuading CME's once-powerful floor
traders to allow more electronic trading, drawing on his history in
the pits to win support for the change.
Mr. Duffy took the CEO job a year ago, after his predecessor
unexpectedly retired. Since then, CME's share price is up nearly
20%. The move into bitcoin is by far the boldest step he has made
as CEO.
"By nature I think he's a pretty conservative guy, but he will
move swiftly when he needs to," said Rich Repetto, an analyst at
Sandler O'Neill + Partners.
CME was tight-lipped about its bitcoin plans before Tuesday's
announcement, and some media reports suggested it had gotten cold
feet. But behind the scenes, the company had long been laying the
groundwork for the launch.
In November 2016, after close to a year of work, CME started
publishing a daily bitcoin price index that will be the basis of
its new futures contract. More recently, CME has consulted with
outside advisers, including major bitcoin investors, about how its
contract would work, people familiar with the situation said. At a
New York meeting in May, the group discussed how CME should handle
a "fork" -- a situation where a breakaway faction of programmers
sets up an alternative version of bitcoin.
Mr. Duffy said he greenlighted the launch in October after
repeatedly hearing from CME customers that they wanted bitcoin
futures. He declined to say who lobbied him directly, but another
CME executive said the firm heard from electronic-trading firms,
hedge funds and exchange-traded-fund issuers, as well as banks
whose own customers had been inquiring about bitcoin.
The 59-year-old CEO said he grew more comfortable with bitcoin
after watching it survive repeated blows, such as a recent
crackdown in China, a major hub for the digital currency.
"It's a story that just doesn't want to go away," he said.
CME makes money by collecting fees when futures contracts are
traded on its markets. That means it is neutral about the price of
commodities, but its profits increase with heavier trading volume,
which often goes hand-in-hand with spikes in volatility.
Creating a new market for bitcoin, which is notorious for wild
price swings, could juice trading activity at CME, bringing in new
fee income at a time when volatility across many of its markets has
been muted. The digital currency has surged more than 600% this
year, briefly hitting a record above $7,300 on Thursday.
But skeptics call the bitcoin phenomenon a bubble that will
inevitably pop, with potential repercussions for CME.
"If the market takes a dive and a lot of mom-and-pops are hurt,
they will blame the futures market, just like they have done a
hundred times in history," said Neal Wolkoff, former CEO of the
American Stock Exchange.
Mr. Duffy knows the inherent risks in trading. As a young floor
trader in 1981, he misheard a customer's order and lost $150,000,
nearly ending his trading career. He was bailed out by his mentor
at the time, a veteran trader named Vincent Schreiber. Mr. Duffy
spent three years paying him back, with money earned from trading
by day and bartending by night.
Today, a portrait of the late Mr. Schreiber sits in Mr. Duffy's
office, amid framed photos of Hollywood stars and politicians whom
the CME chief has befriended over the years, such as Hillary
Clinton and John Boehner.
Mr. Duffy, a registered Republican who has donated to
politicians of both parties, is a seasoned operator in Washington
and has testified on Capitol Hill dozens of times. His knack for
courting regulators could help move CME's bitcoin plan forward and
overcome the skepticism many officials hold toward the digital
currency. CME needs signoff from its regulator, the Commodity
Futures Trading Commission, to launch its bitcoin contract.
Mr. Duffy concedes that his big gambit may fail.
"I'm not saying this is going to work," he said. "But I do know
there is pent-up demand for people to participate in it, and I'm
going to offer it on a regulated platform."
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
November 03, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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