Filed by CBOT Holdings, Inc.
Subject Company -- CBOT Holdings, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
File No. 333-72184
The following communication was distributed to CBOT members on January 17, 2003.
Dear Fellow Members:
As I enter the last few months of my Chairmanship, let me say that I have
been proud and honored to hold this position. We have had two years of major
changes at the CBOT and I am happy that we have accomplished much and did it
while keeping members informed and part of the process.
Throughout my two years, my most important priority has been communication
and this has meant regular information meetings and many letters, press
interviews and availability to our customers and members. Back in 2000, many
lacked confidence in our future and I believe that we have achieved a major
turnaround in our confidence level simply by communicating and listening to you,
We have also made important decisions and taken steps to ensure our future.
Most importantly, this was done with member input and without turmoil or public
controversy. Let me review the important events of the last few months and
what's coming in early 2003.
1. Working Together: Good Management + Good Board = Member Support.
One of my most important goals has been to "institutionalize" good
decision-making. As you know, two years ago our management ranks were thin;
since then, we have made a number of changes and have formed an excellent
Your Board of Directors and the Executive Committee in particular reviewed
management performance and goals and today we have in Bernie Dan and Carol
Burke two people who are excellent managers and communicators. In addition,
we have strong executive talent like Bill Farrow, our Executive Vice
President and Chief Information Officer. Finally, we have also recognized
the fine employees that have had long careers at the CBOT (like Bryan
Durkin, for example) by rewarding them with promotions and increased
In addition to having a fine management group, I believe we have a strong
core group on the Board of Directors. We will have an election on March 12
and it is essential that good people be elected.
What is the profile of a good director? Knowledgeable about our business,
absolutely not letting self-interest (personal or that of his or her firm)
influence decisions, and a willingness to communicate and work with other
directors and members.
There cannot be a disconnect among the management, directors and the
member/owners. All have to be visible and trusted in order to make good
business decisions that the member/owners will accept and that is why being
accessible and open to members is essential. Charlie Carey and C.C. Odom
are excellent examples of this and I am happy to say this is also true of
the rest of the Executive Committee, Mark Cermak and Bob Corvino.
Working with member input makes tough decisions easier. We must distinguish
between member input and member management; one step I have taken is to
eliminate many member committees in favor of working groups or task forces
appointed as needed. By doing so, I have gotten the best people to work on
specific issues and eliminated people who simply like committee titles.
Past Chairman Tom Cunningham gave me some excellent advice when I first
took office: "Work with your directors." The Board of Trade is not a one or
two person operation; it depends upon thousands of member/owners, and the
hard work of management and the Board of Directors.
Let's look at some of the major decisions that have been made.
2. LIFFE CONNECT(TM): Our New Electronic Platform.
At our January 9 Board meeting, we selected LIFFE CONNECT as our new
electronic platform. This culminated months of analytic work that began in
mid-2002, followed by some intense negotiating of contract terms. I think
members would be very pleased if we could fully disclose the details of
this rigorous process.
We consulted with users of our electronic platform throughout this process
and they are very positive about the LIFFE CONNECT selection. The vast
majority of our electronic trading volume today comes from customers and
members already connected to the LIFFE platform through an ISV of their
choice and so we are confident, that with some hard work, we can have a
You will be pleased to know that an industry poll conducted by FOW Week, a
leading futures industry publication, of traders, FCMs and technology
firms, published in the January 20, 2003 edition, found "almost unanimous
support" of our decision to adopt LIFFE CONNECT as our new trading
technology. The FOW Week poll also found general agreement that "Eurex will
find it difficult to succeed" in U.S. competition.
Why did we change platforms when our current Eurex platform is working
well? This was not an easy decision but the bottom line is that the
increased functionality of the LIFFE CONNECT platform better supports our
hybrid business strategy, which is to support two delivery platforms, open
auction and electronic, and to make each as technically efficient as
possible (our arrangement with LIFFE also brings with it software we will
be using to enhance open auction efficiency).
We expect to have the system implemented and ready to launch in late 2003.
Our use of the Eurex platform ends on December 31 of this year, followed by
a 30-day grace period in which Eurex has agreed they will not trade our
core products. We believe we can sufficiently establish our liquidity
during this transition and so meet and beat any competitive threats as we
have in the past.
The Executive Committee worked closely with Bernie Dan and the rest of his
management team in making this selection. The decision was not easy because
we succeeded in getting very reasonable proposals from those competing for
our business. But after considering all factors in the context of our
business strategy, we were unified in recommending this selection for
approval by the Board of Directors.
3. Agreement with Espeed: Side-by-Side Cash and Futures.
In December, we announced that CBOT electronic futures will appear
side-by-side with Espeed's cash markets for government securities and
agencies. This gives customers the ability to trade cash and futures in a
neutral, fully electronic, real time marketplace.
Let me quote John Lothian, a respected commentator on our markets:
Yesterday's top story about Espeed and the CBOT agreeing on a deal to
provide access to the CBOT's electronic futures markets from the
screens to Espeed's cash securities markets was a classic warning shot
fired in the air signaling that there is a new sheriff in town. Bernie
Dan, who was named President of the Chicago Board of Trade in early
November when David Vitale left that role, took little time to
establish himself as a master strategist who is ready to take the CBOT
on to bigger and greater things. This was a wake up call for long-time
and new rivals that a new era at the CBOT has arrived; The Bernie Dan
With one deal Bernie Dan accomplished the CBOT's long time goal of
offering futures and cash securities to traders on a single screen.
This positions the
CBOT with another strong player with aligned interests, leveraging
both entities' strengths to achieve more than they had working
independently, or even at odds with each other.
By doing the unexpected (who woudda thought?), the CBOT has provided
an example of what can be done to maximize functionality, utility and
more importantly market transparency and integrity. This deal opens up
CBOT futures markets to greater numbers of non-futures traders who are
cash market traders and to the large players in the cash markets. It
brings greater liquidity to the CBOT futures markets by offering cash
traders greater trading alternatives, functionality and speed for
4. Finances: Record Volume Year.
In 2002 we did close to 344 million contracts, about 1,365,000 per day, an
increase of 32% from 2001. This is our highest volume year ever and is
substantially above our previous record of 281 million contracts set in
1998, and I believe this growth will continue in 2003. I am particularly
pleased with the performance of some of our new products, particularly the
CBOT mini-sized Dow and our swaps complex. I also believe that within the
next two years we will see major volume increases in our flagship contract,
the 30-year Treasury bond futures contract. With strong exchange finances
and the fact that we are investing more technology in our open auction
markets to make them more low-cost and efficient, these factors should lay
the groundwork for continued volume growth in 2003.
Our electronic volume was about 513,000 contracts per day, two and one-half
times the 209,000 contract average of 2001. Our electronic and open auction
markets are working well together and most electronic volume comes from
participants who use both. Customers account for about 29% of our open
auction volume and 18% of that on the electronic platform.
As you know, we have invested about $100 million so far in bringing the
electronic platform to our markets. This large investment is why so far the
Ceres partnership has not shown a profit with money returns to its limited
partners. In 2003, we are finally at the point where overall profits are
likely and if we successfully transition to our new platform and if volumes
continue to grow, we believe that the electronic platform will become a
Our financial success so far has allowed us to make substantial member fee
reductions for 2003. We had net income of over $33 million for the first
three quarters of this year and this was after the one time cost of $13.7
million to settle the Wagner patent litigation.
Let me review these 2003 fee reductions again. At our August Board meeting,
we set 2003 Floor Fees at .02, a reduction from this year's .05. For 2003,
we waived the technology fees, certain Dow fees, including the $200 a month
Dow activity fee and the .20 per contract Dow Jones supplemental fee. We
also reduced member fees for our electronic trading platform so that they
are now on a sliding scale from .15 to .10, depending on volume.
I believe these fee reductions will help member profits and therefore
should also improve seat prices and lease rates. A member that trades 1000
contracts a day (2000 sides) will, after the fee reductions are
implemented, pay approximately $10,000 in annual exchange fees versus last
year's level of $25,000, a $15,000 savings. A delegate who purchases a seat
would save this amount plus the .15 delegate surcharge, which would save
over $75,000 at that volume level. Similarly, the reduction in electronic
trading fees for members of .05 per side saves a 1000 contract per day
trader about $25,000 per year.
These fee reductions begin in January 2003 and are subject to change in the
future if circumstances warrant. But the CBOT is committed to low fees as
long as the exchange is financially sound, and I encourage all delegate and
non-members to look at the economics of seat purchase.
5. Litigation Update.
When I became Chairman in 2001, we faced four major lawsuits and I am happy
that all four are now settled or decided in our favor.
As you know, one of my top priorities was resolving our differences with
the CBOE concerning CBOT restructuring; this was done in 2001. The Wagner
patent suit was settled this past September.
In both the AM suit and the Sanner Case (which involved the Ferruzi soybean
transactions of 1989), we received directed verdicts from the judges in
those cases. Appeals are likely in both but I believe that the judges'
decisions will be upheld.
Thank you, Carol Burke, for supervising these successful legal efforts.
6. Restructuring Proposal.
Our restructuring strategy started over three years ago, with the goal of
modernizing our operations and in general running our operations more
Putting in place an excellent management group and Board are the
foundations of making good decisions; the electronic trading platform
selection process, the Espeed agreement and our strong finances are some of
Last year I promised to present a restructuring proposal that would be
enthusiastically endorsed by members. Why has it taken so long? Working
with members and the Board to get consensus on the best possible proposal,
which is good, delays in the AM litigation, which were unfortunate, and the
necessary review period of the registration statement related to the
restructuring proposal, and has been in review with the SEC since
I believe that we will be ready for a member vote this quarter. Before a
member vote occurs, we will have a series of information meetings so that
you are fully informed.
7. CME IPO.
I congratulate the CME for its successful IPO. Let me say a few things
about how we stand vis-a- vis other exchanges and how our business strategy
prepares us for the future.
Given that our seat prices are low relative to the $1 million levels of the
CME and NYMEX, members want to know, are we on the right course? My answer
Our proposed corporate structure as described in the registration statement
is generally similar to that of the CME and NYMEX. In fact, most of the
changes to earlier versions of the restructuring proposal (e.g., member fee
preference, a member Chairman, core rights for open auction traders and
members generally, a sixteen member Board much as we have today, special
meeting provisions) came from a review of the publicly available filings
with the SEC made by those two exchanges as well as from the traditions and
common sense approaches of our membership.
Another important improvement to the most recently filed registration
statement over earlier versions of the restructuring proposal is the
stapling of the common stock of the proposed holding company (corporate
equity) and Class B memberships of the proposed exchange subsidiary so that
they generally cannot be sold separately until the membership votes that
they can. This prevents the sale of shares to outside investors until the
membership decides it is time to do so and this concept was also part of
the NYMEX's restructuring. This is important for two reasons.
First, although the CME adopted transfer provisions applicable to its
common stock, those transfer restrictions would have begun to phase out
this past December, which would have permitted individual members to sell
shares on their own. In effect, I believe this largely dictated a deadline
by which an IPO had to be done. Fortunately, this did not seem to affect
their success but from the point of view of the October stock market lows,
this could have been troublesome.
Second, and even more importantly, is that an IPO has to be carefully
considered. The CBOT today has largely "owner-operators," selling shares to
outside investors could mean reduced influence on major decisions. It is
not "free money". Stapling gives us the time to decide how, on what terms,
and even whether such a sale of stock is desirable.
With the changes we have made in our restructuring proposal, I believe a
for-profit Chicago Board of Trade will be in the best interests of our
With respect to our business strategy generally, we have an executive team
that knows our business and works well with our membership, i.e., knows
what they are doing, communicates with members. We have the people
component necessary to success.
Let me emphasize another important point: all three exchanges (CBOT, CME
and NYMEX) are run as "businesses" and all three have "member profits" as
key parts of their strategy. Among this group, we are the only one that
trades substantial amounts of core products electronically during the same
time period with the same contract. In addition, our electronic fees are
lower. I think this clearly shows our commitment to both types of profit
centers, corporate and member, as does our selection of the technically
advanced LIFFE CONNECT platform.
Now let's return to the subject of seat prices and how it relates to the
two types of platform profit centers:
The most important thing about our exchange today is that membership is a
license to earn a living. Most members are owner-operators and what counts
to them is not today's seat price but whether our markets are good, our
customers are being served and the exchange being managed properly.
Second, the electronic platform has given us opportunities to make money at
the corporate level we did not have before. That is why our electronic
platform decision was very important. This decision and its implementation
will determine whether or not we have substantial corporate level profits.
What I have just said reflects the thinking of most of our member/owners.
We have both member and corporate profit centers and both are part of our
business strategy. In year 2000 we had considerable member concern and
turmoil because we did not have an agreed upon view for the future. Now we
do and it means we are a unified member/owner group.
Members trading in our open auction or electronic markets have
"businesses". It is important that the CBOT help these businessmen make
money and this is true for all our members, whatever platform they trade.
That is why we have made the fee changes we have in both trading platforms
and that is why we have a technology strategy for open auction AND
electronic platforms with the goal to make each the best it can be.
Each of the fee changes has its own good reasons: none of them hold back
the growth of one platform or the other and the fee reductions benefit our
members. We are not here to make money at the expense of our members.
Naturally, programs and fees should be fine tuned and evaluated
as we go along but the two platforms are not in a contest with each other.
As long as customers see value in both, as long as we have product lines
better suited to one versus the other, and as long as we have
member/shareholder/businessmen who must be considered, the overall strategy
must consider both.
Members also will be shareholders, and one of the purposes of our
restructuring is to enable the enterprise to distribute dividends, assuming
sufficient revenues and continued reinvestment in both our open auction and
electronic trading platforms.
The CBOT is run as a "business" and this is clear from the many decisions
that we have made over the last few years. We are not wasting money, making
unwise business decisions, leaving the office early, etc. We have a sound
business strategy, our proposed restructuring plan is pretty much like
other exchanges and we have an excellent executive group.
Sometimes people will say we are not run as a business simply because we
are not "all electronic". Unfortunately, many of those making that argument
generally (1) have something to sell to the CBOT and believe it would be
better if the trade was all electronic so that they could sell it, (2) want
an all electronic trade because "I trade electronically and I want all the
trade in my ballpark," or (3) in the case of some firms, believe that the
electronic trade saves them money and makes it easier to internalize (i.e.,
trade against their customers' orders). Others simply do not understand the
nuances of how liquidity is developed and grown.
My feeling is this: only a stupid business would shut down a product line
that many of its customers wanted and was making substantial amounts of
money. We have a complicated business that requires a sophisticated
business plan because it has many different products (grains, options,
contracts with low volume, spreads, as well as high volume front month
contracts) and two platforms. "One size" does not fit all and our strategy
takes that into account.
Let me finish by detailing some of the reasons why I believe our seat
values are currently lagging.
The main reason is that since the 1980's sometimes over half of our Full
seats (i.e., over 700) were at the CBOE and that exchange's memberships are
now at the $150,000 level. Right now only about 500 of our Full memberships
are there. This means that we have absorbed the return of over 200 seats,
while 500 of our 1402 memberships are valued at the CBOE level.
In late 2000, our seats were $80,000 - $100,000 under the CBOE membership;
now they are $150,000- $170,000 over. This is a relative gain of $250,000
since late 2000. Our relationship with the CBOE is a critical factor in our
seat prices and lease rates.
A second important factor is that our exchange has the "lowest cost of
entry" for firms compared to other major U.S. exchanges. A firm can do
business here with one seat and only two seats are required for clearing
membership. At the CME, on the other hand, 2 Fulls, 2 IMM's and 2 IOM's are
required, and remember the CME only has 625 Fulls to begin with.
Management and your Board have been looking at some positive approaches
that could help us further realize the value we believe is in our
memberships. Many factors are beyond our control and others cannot be done
for competitive reasons, but we do run the CBOT as a "business".
When I took office in 2001, I set forth ten promises to you, the members,
and in 2002, added four more. These promises generally involved setting forth a
vision for our future - that we would support both open auction and electronic
platforms, with the best technology available, that our enterprise would be run
as a business, taking into account both member/owner and corporate profits, and
that we would serve our customers by providing liquidity and flexibility
combined with the highest integrity. It also involved putting forward a
restructuring proposal that reflected these priorities and restoring good
relations with the CBOE.
Finally, my goal was to institutionalize good decision-making by selecting good
managers to work with our elected Board.
With the help of excellent volume and good markets, we are financially
sound. I believe our management and membership will meet our challenges in 2003
/s/ Nickolas J. NeubauerNickolas J. Neubauer
While CBOT Holdings, Inc. (CBOT Holdings) has filed with the SEC a Registration
Statement on Form S-4, including a preliminary proxy statement and prospectus,
relating to the restructuring of the Board of Trade of the City of Chicago, Inc.
(CBOT), it has not yet become effective, which means it is not yet final. CBOT
members are urged to read the final Registration Statement on Form S-4,
including the final proxy statement and prospectus, relating to the
restructuring of the CBOT referred to above, when it is finalized and
distributed to CBOT members, as well as other documents which CBOT Holdings or
the CBOT has filed or will file with the SEC, because they contain or will
contain important information for making an informed investment decision. CBOT
members may obtain a free copy of the final prospectus, when it becomes
available, and other documents filed by CBOT Holdings or the CBOT at the SEC's
web site at www.sec.gov. This communication shall not constitute an offer to
sell or the solicitation of an offer to buy, nor shall there be any sale of
securities in any state in which offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
state. No offering of securities shall be made except by means of a prospectus
meeting the requirements of Section 10 of the Securities Act of 1933, as