Welcome to Futures Industry
Will Acworth
Published 10/1/2001

“We have lived in the assumption that the U.S. was a sanctuary. Not any more.” Those were the words of Didier Varlet, chief executive of Carr Futures, speaking four weeks after the World Trade Center was destroyed in the terrorist attacks of September 11. Sixty-nine of his employees, nearly half of Carr’s staff in New York, have not been heard from since the day of the attacks and are presumed dead.

“These were people we knew very well. Everyone is devastated,” Varlet said. Those words could have been spoken by anyone in the futures industry, for Carr was one of its biggest members, and virtually everyone had a friend or acquaintance in that office.

Of all the firms in the futures business, Carr suffered the greatest loss, but no firm was left untouched by the disaster. Dozens of companies had offices in the two towers, and many more were in the immediate neighborhood. Thousands of people were forced to evacuate their offices in lower Manhattan—almost 5,000 are still missing—and the entire area around the World Trade Center complex remains under heavy security to this day.

No one could have anticipated the devastating impact of those attacks, yet the industry recovered remarkably quickly. Disaster plans and contingency facilities were put into action within days, in some cases within hours. Trading operations were shifted to New Jersey, Chicago or London; data was restored from backup computers; and staff moved into new office space in and around lower Manhattan.

More than a month has passed since the attacks and conditions have returned to something like normalcy. The affected exchanges are back in business and trading volumes are back on track for a record year. But the shock has left its mark. Throughout the industry there are reports of individuals breaking down under stress, nervous about working in skyscrapers, even leaving the business. Managers are providing counseling and support, but the long-term emotional impact may take years to overcome.

The attacks also may accelerate the move toward electronic trading, although opinion is divided on this issue. Trading floors disrupted by the attacks proved difficult to reopen, but the Internet remained functional throughout the crisis. Indeed, e-mail proved to be an important means of communication amid the chaos.

Discussions have already begun throughout the industry on what lessons can be drawn from this disaster. No doubt this discussion will continue for months, but one thing is clear: many firms would not have come back so quickly if it had not been for the immediate and unstinting assistance they received from other firms. In the face of a disaster that threatened the entire system, traditional rivalries were put aside and all joined hands to reopen the markets.

Contingency planning is expensive, and probably will become more expensive as firms digest the consequences of the September 11 attacks. This may become another factor in favor of industry consolidation, but at the same time there is an awareness of the dangers inherent in centralization. Morgan Stanley has already made it clear that it plans to disperse its staff more widely in the New York metropolitan area, and other firms are considering similar moves. Day of Terror

Out of the dozens of firms in the World Trade Center complex that engage in futures-related activity, only two suffered catastrophic loss of life—Cantor Fitzgerald and Carr Futures.

Cantor is primarily a bond firm, but its subsidiary eSpeed has developed an electronic system for trading bond futures and certain energy commodities. Many of its employees were drawn from the futures industry, the New York Mercantile Exchange in particular.

Cantor occupied several floors at the very top of One World Trade Center, the first tower to be hit and the second to collapse. None of the people in its office at the time of the attack were able to evacuate. The company has estimated that a total of 657 of its employees are missing and presumed dead.

Howard Lutnick, Cantor’s top executive, has vowed to keep the firm going, but the devastating loss has forced the company into a fundamental change of strategy. Cantor has shut down most of its voice broking operation, which once handled roughly a quarter of all OTC trades in Treasury bonds. Instead, the company is now putting all its resources into eSpeed, which resumed trading Treasuries via its all-electronic platform on September 13, just two days after the attack.

One of the few pieces of positive news for Cantor amid the tragedy was that many members of Cantor’s technology staff typically came to work after 9:00 and therefore missed the first strike. Those employees are now the backbone of the company’s operations in the U.S. and are working with the London office to sustain Cantor’s position as one of the primary inter-dealer brokers in the Treasury market.

Frederick Varacchi, eSpeed’s president and chief operating officer, was one of the many Cantor employees fatally trapped in the building by the attacks. By a lucky break, however, the three people who report to Varacchi were all out of the office. September 11 happened to be the one day in the year when those three were under orders from Varacchi to spend the day together out of the office as a team-building exercise.

Immediately after the disaster, Cantor set up a counseling center at the Pierre Hotel in New York. Cantor also set up a relief fund to provide emergency financial assistance to the many families who lost loved ones in this tragedy, plus some long-term assistance for child care, college tuition and medical care.

Carr Futures: At the Epicenter

The other firm was of course Carr Futures, a subsidiary of France’s Credit Agricole, and one of the 10 largest FCMs in the U.S. In numerical terms, Carr’s losses were much smaller than Cantor, but the firm was just as hard hit. Exactly what happened is still not clear, but it appears that none of the 69 people in the office when the plane hit the building made it out alive.

Varlet, who was on vacation in Spain on the day of the attack, was contacted by cell phone with the news, and immediately set about organizing the response. The first step was to separate the operational issues from the human management issues, and set up different teams to handle each aspect of the disaster.

On the operations side, the firm’s systems were completely backed up and the London and Chicago offices took action the same day to handle the customer business. Carr updated its Web site throughout the crisis with detailed information for customers on the recovery process, including contact numbers for the replacement trading desks in London and Chicago.

On the human side, Carr immediately began the process of tracking down which employees had survived the attacks, and which were missing. With fixed line telephone connections severed and cell phone circuits almost totally jammed, the company resorted to posting contact information on its Web site and asked local television stations to broadcast a toll-free number, hoping that this would reach the surviving employees.

“We immediately decided to make our office in Chicago, which had all the resources to manage this kind of situation, the crisis center,” Varlet said. “Our first priority was to identify how many people survived, and who was in the office.”

On Wednesday, as the scale of the tragedy became clear, Carr set up a welcome center at the Waldorf Astoria for families and friends of the victims. The center remained open for a week and was staffed with psychologists and human resources people to help the families cope with the disaster.

Carr also set up a memorial fund to provide short-term emergency assistance for the families and partners of the victims. The fund is being handled by Northern Trust and has been arranged so that donations can be tax deductible in both France and the U.S.

“Carr has always been like a family,” Varlet continued. “We had incredible support from the other offices overseas. They did not feel remote; they were very close to us, and that has been one of the key elements helping us through this process.”

Carr also provided counseling for people in other parts of its office network who knew people in the New York office, who might even have been on the phone with them during the terrifying minutes after the plane hit and before the building collapsed.

“Obviously the first thoughts were for the people from the office who survived this tragedy. We made a significant effort to do anything we could to help them. But you also have people in the offices of the bank, even in our offices in London and Paris and other locations in the world, who had a contact with the New York office, and met people in that office. We had to make sure that we gave support to all these people.”

Both the chairman and the CEO of the Credit Agricole group, as well as the chairman of its investment bank, attended the memorial services in New York and Chicago. One of the head office officials even took the ferry to visit Carr’s surviving floor team at NYMEX, then walked past the destruction at ground zero to Canal Street.

“The solidarity from the group, the customers and most of our competitors has been really outstanding. The sense of community has been a great strength for us in this tragedy,” Varlet said.

Escaping Just in Time

One firm that came very close to losing its people was SMW Trading, a Chicago-based FCM that clears for locals on NYMEX and NYBOT. SMW had an office on the 85th floor of the north tower, just a few floors below the point of impact. Incredibly, everyone in the office made it out safely.

>Jonathan Markowitz, one of the firm’s partners, normally works in Chicago, but on September 11 he happened to be on one of his monthly visits to the New York office. In an interview with FI, he said the whole building moved sideways when the plane hit then snapped back, sending computers sliding off desks and crashing onto the floor.

>Unlike other offices on that floor, there was no fire, at least not initially visible, and no loss of power or telephones. Even so, the 20 or so staff in the office decided to evacuate. “We decided to leave because of the 1993 bombing and that was the key,” he said.

> Remarkably, there was no panic in the stairway. After the 1993 bombing, the building management had installed better lighting and many firms had established clear procedures for ensuring a smooth evacuation. Indeed, one of the positive surprises of that day was how many people in the towers managed to escape. Morgan Stanley lost fewer than 10 people out of 3,700 in the complex. Lehman Brothers Inc. had only one person missing out of 6,400 employees in three buildings, including 618 in one of the towers.

As the SMW staff descended from the 85th floor, they passed several places where burning jet fuel had come down the elevator shafts but fortunately the way was clear all the way down. “Single file, it took us about an hour and ten, an hour and twenty minutes to get out of the building,” Markowitz said.

>Just as he was about to exit the building, the south tower collapsed. “I stopped on the 30th floor to talk with the firemen. We got separated by the crowd, so the first part of our group was out of the building when the first tower collapsed. I was still inside with my two staffers and I actually saw the shock wave coming towards me, and I had people still in the stairwell behind me.”

“A couple of guys in the first group outran the shock wave, but two people ducked down into a subway. They were in pretty serious shape because they inhaled a lot of dust,” he recalled.

>Meanwhile, people in the buildings around the complex watched in horror as the flames consumed the upper floors and people trapped in the towers began to jump. Rita Giacomelli, SMW’s office manager, was just arriving at work, and saw the second plane hit the south tower. “I saw the buildings explode when the planes came in.”

“It’s still so hard to believe,” she recollected several weeks after the attacks. “I still have a numb feeling. I’m not thinking about it, I’m just focusing on the day-to-day.”

Recovery and Backup

Despite tremendous confusion and disorder, the futures industry set disaster recovery plans in motion within hours after the attacks. Some problems, particularly the restoration of connections to the New York exchanges, took days to resolve, but many futures firms reported that their customer service never missed a beat, thanks to extensive advance planning.

> Several executives pointed specifically to the preparations for the year 2000 date changeover as one of the reasons why the industry was able to recover so quickly. Although the 010100 date came and went without causing any significant disruption, all major firms were required to prepare their backup systems just in case the power failed or their computers crashed and all their customer data were wiped out.

“Because of Y2K, people spent a lot of money on systems backup and disaster planning, and that training put people in good stead for this disaster,” said Charles Nastro, managing director at Lehman Brothers Inc. and co-head of the firm’s futures division.

>At the time of the attacks, Nastro was in his office on the eighth floor of Three World Financial Center, holding a global conference call to review issues related to Lehman Live, the firm’s electronic trading platform. Some of the people with him in the office left when they heard the noise from the impact of the first plane. When the second plane hit, Lehman ordered the entire building evacuated.

The basic infrastructure of Lehman’s electronic trading system was set up in London, so when the New York office ceased to function, London was able to take over.

“Certain clients that were connected to Lehman Live lost connectivity as a result of the attacks, but they were able to call their orders into a desk in Chicago that was manned 24 hours a day,” Nastro said. “Wednesday morning, the London office made all necessary margin payments to exchanges worldwide and sent out the account statements to clients.”

>On Thursday, Lehman’s futures division, along with the rest of the company’s traders in New York, moved into the company’s backup center in Jersey City, across the Hudson river from lower Manhattan. Despite the crowded conditions, Nastro said there was a good team spirit and cooperation from everyone.

Nastro also emphasized the key role played by service provider Rolfe & Nolan in helping the company maintain its services. The firm’s connections to the Chicago Mercantile Exchange and the Chicago Board of Trade were severed by the disruption to communications networks, but Rolfe & Nolan was able to reroute the connections and fill the gap.

“They were wonderful. We didn’t miss a beat, and a lot of that was due to the support and expertise at Rolfe & Nolan,” Nastro said.

The Scramble for Office Space

More than 13 million square feet of office space in lower Manhattan were destroyed by the collapse of the two Trade Center towers, according to real estate experts. Making matters worse, thousands of workers were displaced from the World Financial Center, One Liberty Plaza, and other office buildings adjacent to ground zero that were closed because of the damage.

>As a result, one of the first priorities in the recovery effort was to find office space for dislocated workers. Some firms were forced to use hotels as their temporary offices. Lehman’s investment bankers, for example, took over an entire midtown Sheraton.

> Other firms moved into space generously offered by their competitors, and many people worked at home. In many cases, traders had to be split up and put into different buildings for several weeks while their firms looked for a more permanent home.

One of the more inventive solutions to this problem came from Refco, which moved 25 traders into the Subotnick Center, a mock trading floor at Baruch College on 25th Street, between Third Avenue and Lexington.

>The classroom was built less than two years ago and was outfitted with the latest gear: computers with T1 connections to the Internet, quotes and data from Reuters and CQG, projection televisions for tracking news, and an electronic wall display with real-time market prices. In many ways, the classroom was more advanced than Refco’s own facilities.

> The 25 traders used the classroom for almost a month after the attacks, trading futures on sugar, silver, crude oil and other commodities, before the company found enough space at a new facility to reunite all of its traders.

“Baruch did a superlative job. They provided us with everything we needed. All we had to bring were the wall clocks and the trading tickets,” said Jeffrey Bauml, the head of Refco’s sugar desk.

>Bauml, a former Baruch student and a member of the college’s board of trustees, came up with the idea of using the classroom, and called the college on Thursday, two days after the attacks. Refco had safely evacuated its offices at One World Financial Center, but there was not enough room for all of its displaced traders at the backup facility in New Jersey.

Bruce Weber, the center’s director, arranged for the installation of 20 extra phone lines and got permission to transform the classroom into an actual trading room.

“To have real traders come in and use this helps us, too,” Weber told Associated Press. “We’re telling students that we have a state-of-the art facility and this helps confirm it.”

Spirit of Cooperation

Baruch College was just one of the many institutions in New York City that pitched in to help the survivors of the attacks. Virtually every futures industry professional interviewed for this article remarked on the spirit of cooperation that prevailed throughout the crisis, and emphasized how much it lifted their spirits and helped reopen the markets.

> Rather than taking advantage of the firms weakened by the disaster, the industry offered to help them get back on their feet, sharing their resources and contributing money, space and people to help the recovery effort.

“I’ve been in the futures business for 20 years, and I can’t tell you how proud I am of this industry and how it pulled together,” said Gary DeWaal, executive vice president and general counsel at Fimat USA, LLC . “People have reached out to each other like nothing I’ve seen before.”

FIMAT’s New York offices are in Rockefeller Center in midtown, a long way from ground zero. Although it faced a host of connectivity problems, it was much less affected by the disaster, and offered to share its office space with other firms displaced from downtown.

>Rand Financial took up the offer, and some of its traders temporarily set up shop in FIMAT’s conference room. Numerous other firms made similar offers of help to their stricken colleagues, an important gesture of support even for the firms that had enough space in their backup facilities.

>And when several firms were unable to log into the Internet version of NYMEX’s electronic trading system on Friday, FIMAT, Cargill and several other firms agreed to give them access through their own connections so that they could execute trades when that market reopened.

>Similar cooperation took place at the exchange level. The New York Board of Trade’s trading floor was located at Four World Trade Center. Although the exchange was safely evacuated, its building was completely destroyed and vital operating systems, including a key computer server, were lost amid the wreckage.

> As the exchange began moving operations to its backup facility in Queens, it urgently needed to reestablish connections to member firms. The Chicago exchanges stepped in, sharing e-mail addresses and other crucial information on clearing firms.

Even the government pitched in. When NYMEX was having trouble getting its people through security so that they could assess the damage to its building, the Commodity Futures Trading Commission helped break the logjam by placing a call to the White House. The CFTC also worked hand-in-hand with the New York exchanges in the urgent but high-risk effort to reopen their markets.

Several industry officials also commented on a spirit of pragmatism and determination that prevailed during the crisis, particularly in the first few days. One official compared it to a wartime environment, when people take risks and cut through normal procedures to get things done because of the urgency of the situation. Others said, however, they had deep concerns about the risks of going forward with so much uncertainty, but recognized the urgency of reopening the markets.

>For example, the chaotic shutdown of the trading floors at NYMEX and NYBOT caused many problems for clearing personnel, some of which were not fully sorted out before the exchanges reopened, but people understood the need for “tolerance and understanding” to help the floors recover, said James Davison, president of Cargill Investor Services.

“There was a concerted effort to help in clearing and sorting out breaks, a tremendous amount of open exchange of information, and an exceptional degree of communication,” Davison told FI.

>Davison’s colleague Chris Malo, who oversees the firm’s U.S. operations, said CIS had some large energy clients who needed the energy futures markets to reopen on Friday. There was uncertainty about oil positions, and they wanted to hedge or neutralize their risks.

“Some clients thought they had established positions on Tuesday, but we couldn’t confirm that,” he said. “Customer understanding was what really pulled the industry through.”

> Like many other futures firms, CIS had an office right at ground zero. At the time of the attacks, about two dozen people were at its offices on the 22nd floor of One World Financial Center, and several more were on the NYMEX floor.

Fortunately, all of its staff got out of the area in time, although one employee was not heard from until two days after the attack. To be on the safe side, the company also evacuated its offices in the Sears Tower in Chicago, and ran the business from its disaster recovery facility in Northbrook, about 40 miles north of Chicago.

> Davison, who has spent much of his career in Europe, noted that Cargill was relatively well-prepared for terrorist attacks not only because of the 1993 bombing and the Y2K bug, but also because of its experience with IRA bomb attacks in London.

“We have to recognize that we are an economic target,” Davison said. “It’s a reality of the world we live in.”

Emotional Impact

For many managers in the futures industry, one of the most difficult things to handle about the September 11 attacks was the emotional impact of the disaster. More lives were lost than at Pearl Harbor or D-Day, and many survivors were haunted by the images of death that they saw that day.

>Reactions among the many people affected by this disaster varied. Some in the futures industry—relatively few—stayed away from work because the emotional stress was too overwhelming. Most went back to their offices, but many found it hard to concentrate on their work and spoke of the “numbing” effect of the experience.

“We urged people to see grief counselors, because everyone was affected, directly or indirectly,” said SMW’s Markowitz. “We gave them time off, as much as they needed, but some people would rather be at work, with their friends and a purpose, than at home just thinking about this stuff.”

> But even at the office it was difficult to escape the reminders of the disaster in the news, in the daily round of funerals, in the smoke that continued to rise from the wreckage for weeks afterwards. And not just at work; several people told FI that the disaster claimed familiar faces from local churches, firehouses and school boards in their neighborhoods.

It is clear that the emotional impact will take some time to fade. Some people will be reluctant to work in skyscrapers, particularly landmark buildings like the Sears Tower in Chicago. Some are fearful of going downtown, out of the fear that crowded places might be a target for other terrorist attacks.

> Yet there are signs that people are moving through the grieving process. The memorial services in particular have had a cathartic effect, giving the survivors a way to share their loss and release pent-up feelings of grief. Several industry officials also emphasized the uplifting effect of the warm support they received from the rest of the industry.

Opinions are divided on what the long-term effect will be on lower Manhattan, but some firms have indicated already that they intend to spread their people further apart to reduce risk. Merrill Lynch has put 400,000 square feet of office space in Two World Financial Center up for sublease, out of more than three million square feet that it uses in the complex. And Lehman is moving its headquarters to a 34-story office tower near Times Square in midtown that it bought from Morgan Stanley.

Electronic Trading

For the futures industry, the long-term attractiveness of lower Manhattan will probably depend largely on the future of open outcry at NYMEX and NYBOT. Some industry leaders said the September 11 attacks will have no effect on the debate over the relative merits of open outcry versus screen-based trading, but others strongly disagreed.

“The floors have shown their vulnerability in this crisis,” said Carr’s Varlet. “When you have electronic systems, you can continue to trade even when you are faced with significant attacks,” whereas with the NYMEX, “we have seen that the floor is not very easy to restart.”

“These terrorist attacks will accelerate, and must accelerate, the move to electronic trading, in my opinion. It is a logical consequence,” he added.

>One piece of evidence in favor of Varlet’s view was the fact that NYMEX reopened via the Internet three days before the floor. Lehman’s Nastro, while not dismissing open outcry, expressed surprise at how much volume moved through NYMEX during the brief all-electronic session Friday afternoon.

“There were some problems on Friday, but the amount of trading that went through that day speaks to the potential for that [electronic trading on NYMEX]. There’s more potential than one would have thought,” he said.

> Other evidence from the bond markets also points to the strength of electronic trading, such as the fact that Cantor has gone entirely electronic. However, electronic trading platforms are vulnerable, too. TradeWeb, an electronic system for trading bonds, was based in the World Trade Center and did not resume trading until Oct. 1, even though all of its employees survived.

Perhaps the clearest lesson to emerge from the crisis is that if an exchange remains open outcry, then it must have a backup facility—as NYBOT did—or a robust electronic system. It is also important to point out that Lehman, like several other firms, kept a futures desk open 24 hours a day to take calls from customers who were unable to access its electronic system.

Consolidation But Not Centralization

One of the long-term effects of the attacks is that it may encourage mergers and acquisitions, several industry officials said.

For the moment, the industry will remain focused on finding new locations and rebuilding its backup capacity, but as the situation settles back to normal, there may be increased interest in business combinations as a way to lessen the risk of a catastrophic disaster at a single location.

> The expenses associated with recovery and rebuilding, combined with the cost of strengthening disaster recovery plans, will also be a factor in favor of combinations, the officials said.

“I think this attack may accelerate existing trends towards consolidation,” said FIMAT’s DeWaal. “Small firms will find it harder. There will be a greater emphasis on disaster recovery and that will be costly.”

Large firms like Lehman and Cargill, for example, were able to weather the disaster relatively easily, with a well-established disaster recovery plan, a global infrastructure, and plenty of resources to support staff dislocated by the destruction of the World Trade Center.

>At the same time, however, there is an increased awareness of the dangers inherent in centralizing a firm’s offices in a single location, such as the World Trade Center. So even if there is further consolidation of ownership and resources, the industry may also see a countervailing trend towards geographic dispersion.

“I think all of us are reviewing where we have our backup building,” said Carr’s Varlet. “It must not be too close to the main building, and if you are an international firm, it can be in a different country.”

> In addition, even if the September 11 attacks raised the bar on disaster recovery costs, they have not necessarily convinced the smaller firms to give up their independence.

SMW’s Markowitz assured FI that there is “no desire” at his firm to join a larger firm and lose its culture. Instead, his firm is thinking about whether its current offices, all of which are located close to exchanges, provide enough backup.

> “The question we’re looking at now is whether we should have an office that’s not at any exchange,” he said.

Will Acworth is editor of Futures Industry magazine.

Will Acworth is the editor of Futures Industry magazine.
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