In the towering skyscrapers and prestigious office buildings of Chicago, the letters DRW, IMC, CME, and Cboe are emblazoned, representing the bedrock of the derivatives industry. These firms collectively oversee trillions of dollars in annual trades, lubricating the cogs of global markets, from stock options to corn futures. Anchored in Chicago for decades, they form a linchpin of the city’s $75 billion finance sector, providing thousands of jobs.
Yet, the Windy City’s financial giants face a critical juncture, with a new mayor proposing approximately $800 million in taxes to bridge a budgetary chasm that has swollen to half a billion dollars. Among the proposed levies is a financial transaction tax, a prospect that has raised concerns among companies already grappling with escalating crime rates.
Behind closed doors, market makers and exchanges have joined forces, pooling data and resources to present a unified case to policymakers. While traditionally competitors, they now collaborate to elucidate their substantial economic contributions to Chicago. Although executives have not explicitly voiced relocation threats, private discussions underscore the possibility of departure should crime persist and the transaction tax be enacted.
“We don’t want to leave,” asserted Ed Tilly, CEO of Cboe Global Markets Inc., the entity behind Wall Street’s “fear gauge,” the VIX. “But we cannot be in a position where we are disadvantaged in the most competitive markets in the world, where our competitors don’t face the same economics that we would.”
Chicago officials confront a challenging scenario, forecasting a $538 million deficit in the coming year, compounded by inflation and an influx of asylum seekers without financial means. The derivatives industry, replete with some of the most lucrative enterprises of Chicago, presents a tempting reservoir to bridge this fiscal gap. Just CME Group Inc. and Cboe, the two publicly traded firms, reported a combined adjusted income exceeding $3.6 billion last year.
Mayor Brandon Johnson’s office asserts that no definitive decision has been reached on a transactions tax, and they remain receptive to dialogue with businesses. Jason Lee, a senior adviser, emphasized the city’s diversified economy, remarking, “we are lucky we don’t depend on a single industry.”
While some proposed levies might gain traction with signs of positive change, over a hundred days into his term, Mayor Johnson faces an uphill battle in curbing crime, with robberies surging 24% and vehicle theft nearly doubling this year, despite a 10% drop in murders.
For the derivatives industry, the proposed $1 to $2 levy on every securities contract traded could result in an 800% increase in costs, warns CME.
As the city seeks new revenue streams, Chicago businesses perceive themselves as targets of policies seemingly hostile to wealth, according to Justin Marlowe, a professor at the University of Chicago Harris School of Public Policy.
The derivatives industry, which sprouted in the late 1800s, has burgeoned over time, employing approximately 58,800 individuals in Illinois, signifying a 19% growth over the past decade, far surpassing the overall employment expansion of 5.9% in Chicago in the same period.
Furthermore, the industry has been a linchpin for commercial real estate, with 60% of trading companies that signed leases since 2020 expanding their presence in the city, as per Jones Lang LaSalle Inc.
In a united front, Chicago firms including Cboe, Optiver Holding, IMC Trading, and DRW Holdings are emphasizing to Mayor Johnson that the industry’s economic contributions are at risk if crime persists or if a transaction levy places them at a disadvantage compared to their peers in other cities. While CME CEO Terry Duffy is not part of the coalition, he has conveyed similar concerns in prior engagements.
Mayor Johnson envisions an economic future for Chicago that confronts inequality and past injustices, and his senior adviser, Lee, expresses eagerness to discuss these proposals with the derivatives firms.
Source: Bloomberg
