While its regional peers that once dotted the U.S. have disappeared or been swallowed up by much larger conglomerates, the 139-year-old Minneapolis Grain Exchange has had the distinction in recent years of being the last agricultural futures exchange operating on its own. But soon that too will change.
“The Minneapolis Grain Exchange is like this holdover from a different era,” said Austin Damiani, one of its 402 members who voted overwhelmingly to approve its sale. “We’re the last of the independent exchanges ... and we’re standing up against these giants.”
The grain exchange is being acquired for $275,000 per membership seat, or $111 million in cash and stock. Its new owner is not one of the two heavyweights that dominate the industry that many had thought would eventually snap it up. Rather, it’s Miami International Holdings, a newer and rapidly growing player in the exchanges space.
Miami International has already launched several exchanges, including a new stock exchange that started in September as well as three options marketplaces. It also recently took a controlling interest in the Bermuda Stock Exchange. Within eight years, it’s become the 14th-largest derivatives exchange group in the world.
Its strategy is to build market share by wooing banks and traders away from the big established markets such as the Nasdaq with lower fees and a user-friendly platform. With its purchase of the Minneapolis Grain Exchange, it has found a quick way to enter the futures business where it hopes to launch new financial products and to disrupt an industry that’s currently dominated by the Chicago-based CME Group, the world’s largest derivatives company, and Intercontinental Exchange (ICE), which owns the New York Stock Exchange.
“I’m hoping we can give a voice to those futures merchants that would like some diversity, would like some flexibility in the pricing,” said Tom Gallagher, the chairman and CEO of Miami International, a privately held company with 160 employees headquartered in Princeton, N.J. It also has offices in Miami.
The deal is expected to close next month.
Mark Bagan, CEO of the Minneapolis Grain Exchange since 2005, thinks his institution has a lot to gain from the transaction, too.
It will give it access to more capital to help it stay on top of increased regulatory requirements and to pursue new growth opportunities, he said, adding that it’s much more expensive to launch new futures contracts than it used to be.
“They have the ability to raise money as a private organization much more quickly than we do” as a member-owned organization, he said. “So that was very appealing to us.”
And, importantly for him and the board of directors, Miami International agreed to keep the grain exchange’s name, location and 40 employees intact as well its signature hard red spring wheat contract.
“When you’re leading an organization that’s been around for nearly 140 years, you do feel a sense of pride in that long history,” said Bagan. “I’m very proud to preserve that.”
That hasn’t been the case, he added, with many of the other independent exchanges that have been gobbled up in recent decades.
“The Kansas City Board of Trade was around for probably as long as we were” before CME Group bought it in 2012, Bagan said. “But today, there’s no such thing as a Kansas City Board of Trade, nor are there any employees or anything like that.”
The wave of mergers and acquisitions in the industry has been brought on partly because of increased regulatory scrutiny and requirements.
But also, the writing was on the wall for many of these independent agricultural futures exchanges when the open-outcry system of lively trading floors was phased out by digital trading, said Ed Usset, a grain market economist at the University of Minnesota.
He worked in the trading pits at the Minneapolis Grain Exchange in the 1980s and fondly recalled the exciting and often stressful job that included its own system of hand signals and deal making.
But electronic trading was more efficient and transparent. So, as others did, the Minneapolis Grain Exchange closed its main trading floor in 2008.
It now rents out that space to a co-working group, Fueled Collective, one of many tenants in its historic headquarters that spans three connected buildings in downtown Minneapolis.
“Consolidation just seems to be the name of the game,” said Usset. “The CME Group has an electronic trading platform. You don’t need 10 different trading platforms.”
The Minneapolis Grain Exchange still has a small open-outcry market for options as well as a modest in-person cash market where big grain companies will present samples of wheat, barley, oats and other products. But the cash markets, which historically played a big role in regional exchanges, have mostly died away.
Today, the grain exchange has five agricultural futures contracts — corn, soybeans, and three types of wheat. But the vast majority of its volume comes from hard red spring wheat, a protein-rich grain grown in the northern U.S. and Canada that is used to make breads, rolls and bagels.
“It trades heavier today in terms of volume than it did 10 years ago and than it did 20 or 30 years ago,” said Usset. “It’s a successful contract, but it’s one contract.”
In recent years, the grain exchange has been looking for new business opportunities by leveraging its expertise in the regulatory process to launch new futures contracts.
At the same time, Miami International Holdings has been looking for a way to bring some of its product ideas to the market.
That’s how the two first crossed paths a few years ago. Miami International was looking to launch a volatility futures product, but Gallagher said it had been turned down by CME Group and ICE. The grain exchange was happy to help.
Discussions evolved from there to a possible acquisition.
“The Minneapolis Grain Exchange has a very comprehensive set of licenses that are extremely hard to get, particularly the clearing license,” said Gallagher.
Regulatory changes brought on by the Dodd-Frank Act have made it more challenging to start new futures exchanges. Gallagher said he realized that it probably would have taken him about three years to build his own futures exchange from scratch. By acquiring an existing exchange, he’s able to speed up his entry.
Through the grain exchange, Gallagher said Miami International hopes to introduce a dozen new financial futures products over the next couple of years, including a corporate tax index. The grain exchange is also working on a new cryptocurrency-related contract.
Gallagher added that he expects to increase the head count at the Minneapolis Grain Exchange and to give current employees the opportunity to work on Miami International’s other options and stock exchanges if they wish. He’s also evaluating what physical improvements he might make to the historic building.
Damiani, an independent trader who also worked in the grain exchange’s trading pits before they closed, said the acquisition is bittersweet for him since he’s fond of its history and tradition.
At the same time, he voted to approve the deal and thinks Miami International will be a good fit for the company.
“It is a bigger sort of umbrella,” he said, “and it will allow us to compete with other large players that have deeper pockets.”