Crain’s: Futures broker R.J. O’Brien is on an international binge

The 105-year-old firm is banking on expansion to survive in a dog-eat-dog environment.

Chicago futures broker R.J. O’Brien & Associates is a survivor, outlasting and outsizing local rivals over its 105-year history. Now its future hinges on international expansion.

The firm added an office in Dubai last year, opened a Paris outpost this year and is eyeing inroads to Singapore, CEO Gerry Corcoran says. Acquisitions are an integral part of the strategy, and it’s evaluating European acquisitions as well, he says.

Corcoran’s plans may be as much about defense as offense in combating the big New York banks and acquisitive international players that have come to dominate the industry, elbowing aside smaller Chicago firms that grew up alongside futures exchange giant CME Group. With revenue under pressure in the U.S., it’s a dog-eat-dog environment pushing smaller brokers like R.J. O’Brien to pursue global opportunities.

“It continues to be a tough environment,” says Matthew Kluchenek, an attorney at Mayer Brown who has had brokers as clients. “There are clearly huge scales of economy with larger books of business, so I would anticipate further consolidation.”

Brokers generate fee revenue by acting as intermediaries for companies, farmers, traders or everyday investors placing buy and sell orders for futures contracts with exchanges. In addition, they earn interest income on customer money held as collateral for client trading. In clearing trades, brokers must assess clients’ financial wherewithal and bear the risk of losses.

Pricing competition has cut into fees over the past few decades as JPMorgan Chase, Goldman Sachs and three other major banks have come to control more than half the market. And low interest rates since the recession have curtailed brokers’ interest income. Meanwhile, costs for technology and regulatory compliance climbed, squeezing profits.

Today, there are about 60 futures brokers, also known as futures commission merchants, in the U.S., down from 160 in 2007. The decline has taken its toll on Chicago’s cottage industry, with firms shuttering or selling out to larger companies. R.J. O’Brien is the second largest of a handful headquartered in the city, after Archer Daniels Midland.

It traces its roots to John McCarthy, an Irish immigrant who sold butter and eggs from a cart pushed along Chicago streets and who eventually built a business that became a founding member of CME. His son-in-law, Robert O’Brien Sr., later gave his name to the firm and, at 101, remains the Chicago family’s patriarch.

R.J. O’Brien has about 550 employees today, including 350 in Chicago. While it has a sweet spot in serving farmers and ranchers seeking to hedge risks by buying or selling futures, it also caters to big agribusiness companies and to speculators like commodity hedge fund managers.

While overall futures trading continues to rise, the growth is increasingly driven by international trades flowing over ever-larger electronic systems. Chicago-based CME, which operates the biggest futures exchange in the world, booked record volume last year.

“The international market outside the U.S. has largely been neglected,” especially by midsize and smaller brokers, Kluchenek says.

But R.J. O’Brien has begun to tap the global demand. Its U.S. revenue has grown at a slower rate in recent years, but international sales have jumped to become a bigger part of the business. International revenue accounted for 36 percent of the top line last year, compared to 1 percent in 2010, the firm says. The privately held firm booked record revenue and profit last year, Corcoran says, but he declines to be specific.

The slower U.S. growth shows up in R.J. O’Brien’s regulatory filings. Its customer assets in U.S. segregated accounts rose just 4 percent over the past three years to $3.92 billion as of March, according to monthly filings with the Commodity Futures Trading Commission. Worldwide, the firm says its current client funds total about $5 billion (including $4.14 billion in the U.S. as of June).

“Certainly one of the biggest challenges—and one faced by all CEOs—is revenue growth,” Corcoran says. “With that said, I’m comfortable with our efforts and results.”

To jump-start European growth in 2015, R.J. O’Brien bought London-based Kyte Group, and there may be more of that activity on the way. Last year, it hired Stephen Brodsky, former CEO of the shuttered Spot Trading enterprise, as chief strategy officer to spearhead expansion.

“We have a number of acquisition targets on our drawing board,” says Corcoran, adding that for the moment its interests are leaning outside the U.S. “The opportunities we’re looking at today are European.”

The firm took a pass, or lost out, on an opportunity last year to buy longtime Chicago rival Rosenthal Collins Group before it was sold in December to British firm Marex Spectron. Corcoran declines to comment.

R.J. O’Brien itself has been a target in the past. The O’Brien family sold a controlling stake to private-equity firms in 2007, but they bought it back in 2010 as the recession undercut business values in the industry. Today, three generations of O’Briens control the board with nearly 90 percent ownership.

Corcoran says the firm and its owners are determined to remain independent. “We’re not in any way thinking about selling the business,” he says. Still, deal-driven industries have a way of making offers too good to refuse.

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