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New blood buys into OneChicago

Crain’s Chicago Business
By: Ann Saphir June 02, 2008

An investment firm that's made hundreds of millions of dollars betting on the fortunes of global exchanges is backing OneChicago LLC, the single-stock futures market that's struggled to win clients since it opened six years ago.

Toronto-based Urbana Corp., a publicly traded money manager, paid $3.2 million in April for a 3.2% stake in the exchange, joining fellow owners CME Group Inc. (29%), Chicago Board Options Exchange (24%) and Greenwich, Conn.-based Interactive Brokers Group (40%). The rest is owned by former management.

Urbana and its controlling shareholder, Thomas Caldwell, typically buy stakes in private markets, betting that an initial public offering or a purchase by a larger rival will result in a big payday. Mr. Caldwell amassed the second-largest stake in the New York Stock Exchange before it went public at a price as much as five times what he had paid. He also has invested in CME and CBOE seats.

OneChicago is "the only single-stock futures exchange in the U.S., and it's a market we feel has tremendous upside," says Jennifer Radman, who helps manage $243 million for Urbana.


CME and the CBOE have sunk more than $15 million each into the venture since founding it with the Chicago Board of Trade in 2002. But OneChicago's products, which allow investors to bet on stocks without buying or selling shares, have never really caught on. In 2006, Interactive put in $20 million in a move that then-OneChicago President Martin Doyle said would help the exchange "build on its momentum."

While the market initially saw a jump in trading, volume rose just 1.9% in 2007 and plummeted 54% this past April, the most recent month for which data is available.

Mr. Downey, a former Interactive Brokers executive who took over as CEO in December 2006, says those numbers will turn around as the credit crisis boosts demand for the market's products.

Hedge funds that long relied on easy credit from banks to finance their stock trades are suddenly being charged more to borrow, he says. That's forcing them to look for alternative ways to bet on stocks — and that's exactly what OneChicago offers. Each futures contract covers 100 shares of stock.

"When trading profits are getting squeezed, people are looking to save money," Mr. Downey says. "We are definitely seeing signs of people coming back in." Indeed, Urbana's purchase values OneChicago at $100 million. Interactive pegged its worth at half that two years earlier.

Trading on the electronic "book" — as opposed to pre-arranged trades that are simply reported to the exchange — has doubled since last year, he says. That increase is masked by a decline in pre-arranged trading, which was dominated by offshore firms seeking to use single-stock futures as a way to dodge tax-withholding requirements but dried up after the Internal Revenue Service opened an inquiry into the propriety of a similar type of trading, he says.

OneChicago still faces hurdles, not the least of which is the reluctance of major brokerage firms to offer single-stock futures out of fear that they will compete with their profitable stock-lending programs, Mr. Downey says. The market also is hampered by dual oversight, which comes from both futures and securities regulators.

"They are in a prizefight with one arm tied behind their back," says Russell Wasendorf, CEO of Chicago-based Peregrine Financial Group Inc., who has written a book on single-stock futures.

Mr. Downey insists that predictions of OneChicago's demise are premature.

"You keep an eye on OneChicago," he says. "It is not a dead issue."