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Chicago flood washes out commodities trading; $130 billion in trading lost forever to foreign markets.

$130 billion in trading lost forever to foreign markets

The catastrophic surge of waters below the streets of Chicago last week was a sobering lesson to the nation about the significance of the crumbling foundations of our nation's cities.

While it will take months and perhaps years to sort out of the exact causes of the freak flood that has wreaked havoc on the world's greatest mercantile exchanges, the surging waters of the Chicago River through the old, underground

freight-tunnel system underneath the city's central business district demonstrated the critical role of public infrastructure to the nation's economy.

At the very center of the flooding stood the Chicago Board of Trade (CBOT), the world's oldest and largest futures exchanges and the city's financial anchor. The shutdown halted more than $130 billion in daily financial trading and affected more than 140,000 jobs tied to the Chicago Board of Trade, the Chicago Mercantile Exchange, and the Chicago Board Options Exchange.

In a matter of hours after the accident, billions of dollars worth of financial exchanges left the largest and most efficient market in the world and moved to competing cities. Some moved to Chicago suburbs; some moved to Kansas and New York City; but much moved to London, Singapore, and Tokyo. The next day, trading volume in U.S. government bonds on the London Financial Futures Exchange more than quadrupled its previous all-time record.

Thomas R. Donovan, the President of the Chicago exchange, put is succinctly: "Our market position can be very fragile."

The city's central business district was declared a federal disaster area by President Bush on April 14 after a rupture in a Chicago River retaining wall poured 250 million gallons of water into an underground tunnel system. The water flooded building basements and forced the shutdown of electrical power in downtown Chicago to reduce the risk of fires.

City Leader

The City of Chicago demonstrated enormous resilience to restore normal trading.

The spokesperson for the Chicago Board of Trade said full operations were resuming "thanks to the gargantuan efforts of the city of Chicago."

He said the efforts put forth were on a military scale and coordinated by the city with the private sector, especially Commonwealth Edison.

But he said:

"The trading opportunities that were lost can never be recaptured."

World Leader

The Chicago downtown district, transformed from two generations ago, is a world class financial center today. From the days of stockyards, warehouses, and packing plants that served as a Mecca to thousands leaving southern farms; the center of Chicago today has become the futures market for the world.

The volume of exchanges on the futures markets in Chicago dwarf any other city around the globe. The market is estimated to be 10 to 25 percent more efficient for traders than any competing city can offer. In fact, a spokesman for the Chicago Board of Trade (CBOT) said that between the Board of Trade and the Mercantile Exchange, Chicago handles approximately half the world volume:

"We have always measured Chicago against world volume. That preeminence has eroded from nearly absolute dominance in 1977 as the rest of the world realized the potential of futures to risk management and price discovery."

He said the Chicago share through the Board of Trade had declined from 37 percent of world trade in 1985 to about 25 percent today, even while the daily volume of contracts on the CBOT is currently about 350,000 compared to a daily average in London--the city's closest competitor--of about 1500.

The Chicago markets demonstrate the innovation, imagination, and technological leadership in one city critical to moving not just one city or one industry, but the entire nation. At the same time, the freak flood demonstratesthe central underpinnings of the city's public infrastructure to the city's preeminent role for the nation and the world.

Global Markets

The daily futures exchanges in Chicago have enormous impacts on small cities and towns throughout the United States. They affect the price of every commodity raised and harvested in the communities of Nebraska, Kansas, and the Dakotas to Florida and California.

The events in Chicago made clear how fragile the hold of Chicago on those markets can be. Failure to insure the foundations upon which those markets operate and affect so many American communities and corporations could cede one of the most dynamic areas of American leadership to cities in other nations. If anything, the Chicago flood demonstrated that those moves can take place not within decades, years, or months--but overnight.

Lester Thurow, the dean of MIT's Sloan School of Management recently wrote of Japan:

"No one is investing more to secure future economic success."

He wrote of the United States:

"Among the major competitors, none is preparing less for the economic competition that lies ahead."

He wrote:

"While Europe embarks on an ambitious high-speed rail network to link its major cities, unspent funds pile up in highway and airport trust funds in the United States. Japan has a plan for rewiring itself with fiber optics (building the electronic highway of the 21st century); America does not.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Apr 27, 1992
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