CME makes a new bet on the future
By Lynne Marek May 05, 2014
Mark Fields, managing director of CME Group Inc.'s strategic investment group, is overseeing the company's new venture fund, which aims to invest in early stage technology companies.
Stephen J. Serio
Futures exchange operator CME Group Inc., as much a technology as a trading company today, is on the prowl for tech startups.
Like other Chicago-based companies such as rival CBOE Holdings Inc. and Motorola Solutions Inc., CME is looking to develop a pipeline to technology trends that could spark new businesses. The idea is to provide mentoring and inject between $500,000 and $5 million in each new venture.
“They get first look at innovation and can create an ecosystem around themselves,” says Jeff Carter, co-founder of the Chicago-based Hyde Park Angels venture organization and a former CME board member. “Vertical silos will not survive.”
The CME venture fund, Liquidity Ventures I LLC, was conceived last year to take minority stakes in early stage companies and made its first investment in March in a data encryption service company it won't name. A second investment, in Vancouver, British Columbia-based quantum processor software company 1QB Information Technologies Inc., is pending.
CME began its foray into venture investing with encouragement from board member and venture capitalist Jack Sandner. It tapped Mark Fields, managing director of CME's strategic investment group, to oversee the initiative.
“We invest in early stage technology companies because we never know how a new technology—even general use technology—might have applications in financial markets several years from now,” Mr. Fields says in a statement.
CME expects the startups will benefit from its corporate knowledge and, in turn, the company will glean a better understanding of how their innovations may affect its business, spokeswoman Alexandra Gorbokon says.
The exchange operator won't disclose the total amount of capital it's channeling into the fund. It's likely to lose money on some unproven ideas. But even at $5 million a pop, it's a relatively inexpensive gambit for a company that earned $978 million last year and had nearly $3 billion in revenue.
LOOKING FOR LEADS
CME is seeking leads from people such as entrepreneur and Chicago Ventures co-founder Stuart Larkins and Chicago-based Freshwater Advisors LLC consultant David Weinstein. Mr. Larkins suspects one area that CME will be interested in is electronic transactions and payments.
The much smaller CBOE is pursuing a parallel strategy. In March, it announced it would take a minority stake in New York-based options software developer Tradelegs LLC, which designs options strategies for asset managers based on market factors. In 2011, CBOE bought a minority stake in Chicago-based Intellectual Property Exchange International Inc., a platform for trading patent rights.
It seems to make . . . sense, as long as you're not overexposing yourself.
— Gaston Ceron, Morningstar Inc.
A string of futures industry scandals, including the 2011 collapse of futures broker MF Global Holdings Ltd., crimped CME trading volume and underscored the company's dependence on futures trading. While it has added a new swaps clearing franchise, prompted by a federal mandate, most of CME's recent innovations—such as the opening of a European futures exchange in April and the launch of a new aluminum futures contract this month—are iterations of its current business.
CME shareholders appear to want more earning power from the company. While shares rose throughout last year, at $69.57 on May 2, they're still trading well below a $142.90 peak in December 2007.
Morningstar Inc. analyst Gaston Ceron, who follows CME and other exchanges, wasn't aware of the company's new venture fund but suspects CME would benefit from access to budding technology entrepreneurs, even though a lot of startups fail. “It seems to make some sort of sense, as long as you're not overexposing yourself,” says Mr. Ceron, who is based in Chicago. “It could help you stay ahead of technology trends.”
Innovation is in CME's roots. Chicago traders created the first commodities futures market in the city in 1848, spawned the Chicago Board Options Exchange in 1973, and were first to take an exchange public in 2002 with the CME's initial public offering.
“There are limited sources of funds for startups in this industry,” says Mark Longo, founder of online options radio broadcast site Options Insider Inc. who last year helped form an association of trading industry entrepreneurs. “The exchanges are realizing that, and they're starting to realize it's worth their time to find some of them.”