They built it, nobody came
CHICAGO STOCK EXCHANGE | Mounting losses and dwindling cash reserves are raising questions about its survival
The Chicago Stock Exchange suffered sharply wider financial losses in 2007 that if not stopped this year will raise questions about how long it can survive.
The exchange, which has hired an investment bank to solicit buyout offers or partnerships, said it lost $15.1 million in 2007 on revenue of $23.5 million. That compares with a 2006 loss of $4.9 million on $29.6 million in revenue.
(Brian Jackson/Rich Hein/Sun-Times)
"The results are disappointing, but they're not out of line with our expectations because of what we've had to spend to improve our technology," said the chief executive, David Herron.
Equally worrisome to some shareholders was a drawdown in the exchange's cash reserves. At the end of 2006, the exchange held cash and securities valued at $29.2 million, but by year-end 2007, the amount had declined to $17.5 million.
The exchange, known by its ticker symbol CHX, has moved from a traditional trading floor operation that relies on specialist firms to an electronic marketplace. It said that over the last three years, it has spent almost $10 million to launch the trading system and has budgeted another $900,000 for it in 2008.
However, the CHX has continued to lose market share against competitors such as the Nasdaq Stock Market. "It's like they built it, and nobody's coming," said shareholder Patrick Arbor, who has agitated for changes at the CHX.
"The burn rate is unacceptable, and I think the performance is unacceptable," said Arbor, a former chairman of the Chicago Board of Trade. But he praised managers for addressing the situation with urgency and for soliciting outside investment.
In 2006, the CHX received a total $20 million cash injection from four investment banks, Bank of America Corp., Bear Stearns Cos., E-Trade Financial Corp. and Goldman Sachs Group. In return, they got preferred shares in the exchange worth about a one-third ownership stake.
But their involvement so far has failed to draw new business or investors. Meanwhile, CHX competitors have been sold to such deep-pocketed buyers as Nasdaq and the New York Stock Exchange.
The CHX said in March it has hired San Francisco investment bank Financial Technology Partners LP to help it evaluate "financial and strategic alternatives."
Herron said the exchange is entertaining "a couple serious expressions of interests."
He said, "I'm comfortable with where we are. With or without a transaction, we're not going to do anything out of desperation."
The 2007 losses, Herron said, included a onetime charge of almost $5 million to wrap up a pension plan that covers current and former employees and to fully fund its obligations. Within the last two years, the exchange has reduced its employee head count to 110 from about 180, he said.
The exchange issued its 2007 report at a shareholder meeting Thursday at which an Arbor-backed candidate was elected to the board of its parent company, CHX Holdings Inc.
The candidate was Jeffrey Neal, a former Merrill Lynch & Co. executive and onetime assistant budget director for the State of Illinois.
By converting to an electronic market, the exchange no longer operates a trading floor that was built over Congress Parkway at LaSalle Street. It now subleases that space to firms that use it to trade in a variety of markets.
The CHX also said it is working with federal regulators in an ongoing probe of trading practices by its former specialists. Herron said federal officials are conducting the review at all exchanges in the wake of a scandal a few years ago at the New York Stock Exchange.
