FT SPECIAL REPORT

Doing Business in ChicagoFriday December 16 2016 www.ft.com/reports | @ftreports

Vibrant inner city sustains economyHigh murder ratecompels Chicago toconfront its ‘tale oftwo cities’ image,writes Lindsay Whipp

E nglewood is one of Chi-cago’s poorest neighbour-hoods but just months agoit welcomed Whole Foodsinto the community. The

US supermarket chain is known forsuch high prices that its nickname is“WholePaycheck”.

The aim of bringing the upmarketgrocer, which has reduced prices forits Englewood store, to the area withits predominantly African-American

community is toserveasacatalyst formuch-needed economic revival inthis south side district. The move’stimingcouldnotbemorepertinent. Itcomes as the city’s murder rate hit atwo-decade high this year, highlight-ing, experts say, the desperationamong youngsters who have littlehope of leading a life that many inChicago’s middle class areas take forgranted.

“Whole Foods is a good start,” says

Steve Koch, Chicago’s deputy mayor,a former investment banker respon-sible for implementing the city’s eco-nomic policy. “What that started withis recognising that if we want tochange the trajectory of a neighbour-hood, we need to create a retail corethat’s vibrant, that creates resourcesthat attract people to that neighbour-hood, and make it a good and healthyplace forpeople toraise families.”

Chicago’s story is often described as

a “tale of two cities”. A few milesnorth of Englewood, the city trans-forms into an affluent downtownarea, which continues into the north-ern neighbourhoods. Tourists visitthe city’s vibrant centre, eating atworld-class restaurants, wanderingaround art galleries and gazing at askyline still graced by what were theworld’s first skyscrapers. The WrigleyBuilding and others are accompanied

Continued on page 2

Downtown appeal: Flamingo by Alexander Calder in Chicago’s Federal Plaza, is one of the city’s most famous landmarks — Emrah Altinok/Getty Images

2 | FTReports FINANCIAL TIMES Friday 16 December 2016

Doing Business in Chicago

Inside

The rise and revoltof the city stateChicago is a globalplayer and thrives onits opennessPage 4

Start-ups focus onunsexy B2B clientsThe tech scene isinventing apps for thecity’s legacy industriesPage 5

Companies move tomillennial hotspotsSuburbs lackdowntown appealPage 6

Life beyond theopen-outcry pitsThe city is still thederivatives capital ofthe worldPage 6

From WiFi highs togun crime lows

Gogo’s chiefis trying tohelp combatsoaring rates

of violentcrimePage 8

ContributorsLindsay WhippChicago correspondentShawn DonnanWorld trade editorNeil MunshiFT reporterPatti WaldmeirNorth America correspondentGregory MeyerMarkets reporter

Emma BoydeCommissioning editorSteven BirdDesignerAlan KnoxPicture editorFor advertising details, contact:Brad White, +1 214 284 8144 andbrad.white@ft.com, or your usualFT representative.This report is produced by the FT.Our advertisers have no influenceover or prior sight of the articles.

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by a range of contemporary, andtaller, high rises filled with the head-quarters of global companies such asBoeing. Others like McDonald’s aremoving to the centre to attractyounger talent graduating from thecity’sworld-classuniversities.

Having successfully diversifiedaway from manufacturing, Chicagohas no industry that accounts formore than about 15 per cent of thecity economy. Economic output inthe metropolitan area expanded byan estimated 3.1 per cent last year, upfrom 1.5 per cent in 2014 and fasterthan the 2.5 per cent average of all UScities, according to the US Bureau ofEconomicAnalysis(seechart).

“You can’t rank it in same way asNewYorkandLondon,butbelowthatChicago is one of the great global cit-ies and has been there for quite a longtime,” says Ivo Daalder, president ofthe Chicago Council for GlobalAffairs, and former US permanentrepresentative to Nato. He notes thatits problems, if “pretty pronounced”,are similar to those experienced byother American cities. “There’s notone solution and they have to do it allat the same time. But the city is ascommitted to [solving its problems]as any. Getting it done is importantfor thecity tothrive,”hesays

The city, which former residentPresident Barack Obama has chosenas the site for his presidential library,has a long way to go to close the eco-nomic and opportunity gap betweendifferent areas of Chicago and help itshake the title of being among themost segregated cities in the US. Thecollapse of Chicago’s traditional man-ufacturing industries resulted inwidespread unemployment of thecity’s low-skilledworkers.

Its policymakers are seeking long-term remedies for this while tacklingmanyotherpressingproblems.Theseinclude finding a solution to the city’sspending, which consistently out-paces revenues, and plugging a gap inits pension funds that it estimatedamounted to $33.8bn at the end of2015.

First elected in 2011, city mayorRahm Emanuel is engaged in a toughsecond four-year term. Last year’spolice video release showing anofficer fatally shooting a black youthdealt a blow to his reputation,although recent polls suggest this hasstarted to recover. The Chicago PoliceDepartment is implementingreformsunder a new African-American chiefsuperintendent, Eddie Johnson, toimprove accountability and relationswithminoritycommunities.

Continued from page 1

If Whole Foods’ outlet, which sitsnext to a similar project by Starbucksin Englewood, can boost the localeconomy, it could help create a virtu-ous cycle of employment opportuni-ties and further investment, provid-ing hope to disadvantaged communi-ties.

Youth unemployment in low-in-comeblackcommunities isabigchal-lenge for Chicago. Data from theGreat Cities Institute, based in theUniversity of Illinois at Chicago,showsthat in201440percentofAfri-can-Americans aged between 20 and24 in Chicago were neither employednor in education, compared with 18per cent for the Latino populationand6.3percent forwhites.

The lack of opportunities contrib-utes torisingviolence,expertssay.

John Hagedorn, professor of crimi-nology at the University of Illinois atChicago, explains that since the biggangs that characterised the 1990swere crushed, they have splinteredinto small cliques that fight oneanother but are not organised in anyhierarchy with clear leaders, makingtheproblemmuchtoughertotackle.

Prof Hagedorn says: “The level of

desperation among young black peo-ple [in poor neighbourhoods] isincrediblyhigh.”

As part of its attempts to deal withescalating violent crime and the pro-liferation of guns, the city is spendingmillions of dollars on increasing thenumber of police officers on thestreets and providing youth mentor-ingprogrammes.

The funds to pay for the pro-grammes come from the cost cuts thecity’s chief financial officer Carole

Brown has been implementing aspart of a plan to eliminate the city’sdeficit.

She has been grappling with thecity’s gaping hole in its four pensionsystems, which has pushed Chicago’scredit rating to junk level at Moody’s.Higher property taxes have beenintroduced to help fund two of theschemes and there are moves toaddress the funding hole in theremaining two. “We’re not done butprogress in the past six years is prettyremarkable,”saysMsBrown.

So far, Chicago’s problems have notdiscouraged big companies frommovingtothecentreof thecity.

Phil Molyneux, regional presidentof the Americas for UK technologycompany Dyson, whose US opera-tions are based in Chicago, praises thecity for its talent pool and proximityto potential retail partners. He addsthat the city’s problems do not con-cern him. “It hasn’t really had anyimpact on my thinking. There are somany great points about Chicago, itreally doesn’t come up as having animpact on business processes or mythinking for future,” he says. “We’recommittedtostayinghere.”

Vibrantinner citysustainseconomy

Regeneration: outside the Whole Foods store in the deprived neighbourhood of Englewood

GDP growth

Source: Thomson Reuters Datastream

Annual % change

-1

0

1

2

3

4

2011 12 13 14 15

ChicagoAll US metropolitan areas

FINANCIAL TIMES Friday 16 December 2016 FTReports | 3

Doing Business in Chicago

Chicago’s city governmentmust do a lot of printing. Somuch that Carole Brown, thecity’s chief financial officer,reckons she can cut $2m in2017 alone by reducing reli-anceonpapercopies.

This cost cutting highlightsthe extent to which everypenny counts. The formerLehmanBrothersandBarclaysCapital banker hopes to elimi-nate the city’s structural defi-cit, the long-term mismatchbetween spending and reve-nues, and put its four pensionschemes on a path to sustaina-bility, plugging a multibillion-dollar fundinghole.

Ms Brown is reducinghealthcare costs, improvingthe collection of money that isowed and raising additionalfunds by, for example, sellinglandassets.

She has also introduced asystem of zero-based budget-ing, inwhichall expensesmustbe justified for each newperiod.

“By eliminating the wasteand fat in the budget it enablesus to make investments with-out raising taxes,” says MsBrown, who took over the rolein2015.

There would not be muchleeway for Ms Brown to raisemore taxes anyway. Chica-goansarealreadyfacinghigherproperty, sewage and watertaxes, as well as telephone sur-charges, introducedasawaytohelp fund the city’s pensionschemes, after the IllinoisSupreme Court declared thisyear that the city’s plan to

reduce payouts was unconsti-tutional. The city’s financialquagmire, which the currentadministration, led by mayorRahm Emanuel, inheritedfrom predecessors, promptedMoody’s to slash the city’scredit rating to junk last year.Moody’s outlook for Chicagoremainsnegative.

However,Chicago’s financialwoesdonotseemtohaveactedas a deterrent for corporateinvestment in the city. Andalthough both Standard &Poor’s and Fitch, the otherleading rating agencies, stillrate the city at only a lowinvestment grade, theyrecently changed their out-looks for the city’s debt to sta-ble from negative, after thecity agreed to introduce thesewer and water taxes to helpfund its municipal pensionplan.

The city offers a number ofincentives to encourage com-

panies from different indus-tries to base themselves oropen regional operations inChicago, which accounts fornearly a quarter of the Illinoiseconomy. These include taxreductions, loans and fee waiv-ers.

Once the state senate haspassed legislationtoenable thecity to fully enact plans to sta-bilise a couple of its pension

funds, it will, according to MsBrown, have put the fourschemes on a course to being90 per cent funded over thecourse of 40 years. She argues,though, that the city has notreceived the recognition itdeserves.

“There doesn’t seem to be alarge acknowledgment of alltheprogressmade[inthecity’sfinances].”

All three rating agencies saythey need to see furtherimprovements before theywould raise their ratings.Moody’s points out that as theplans take effect, the pensionliabilities are likely to getworse before they get betterand that the funding estimateswill depend on meetingassumedinvestmentreturns.

“If they hadn’t made some ofthe really unprecedentedchanges they’ve made, the rat-ing would likely have beenlowered,” says Rachel Cortez,ananalystatMoody’s.

As the city prepares to go tomarket early next year to raise$1.25bn, Ms Brown facesanother problem: higher bor-rowing rates. The election ofDonald Trump has triggered arise inbondyields.

“It does impact us so that’swhy it’s really necessary for usto continue doing the work onourfinances,”MsBrownsays.

Cost-cutting and taxes target financial quagmireDeficit

Rating agencies saythey cannot raisecredit rating yet,writes Lindsay Whipp

Carole Brown: looking for further savings — Matthew Gilson

4 | FTReports FINANCIAL TIMES Friday 16 December 2016

Doing Business in Chicago

I t has been tempting of late toproclaim that we are witnessingthe end of globalisation, that aresurgent populism feeding oneconomic anxiety signals an era

isover.That may turn out to be true and

there is no doubt that the election ofDonald Trump as US president andthe UK referendum vote to leave theEuropean Union ought to be cause forreflection.

Butconsider themessagethatcitiesare sending and you can arrive at averydifferentconclusion.

The votes in the US and the UKhave highlighted the large gapbetweenurbanareas—withtheircos-mopolitan elites — and a disgruntledelectorate inthehinterland.

Yet that gap is not always put intocontext.

Chicago, like every leading popula-tion centre in the US, rejected DonaldTrump. His rival, former secretary ofstate Hillary Clinton, won 83 per centof the vote in the city and 2,018 of its2,069votingprecincts.

In fact she swept the vast majorityof cities in the US on her way to secur-ing some 2.7m more votes than theRepublican president-elect nation-ally. The US’s quirky electoral collegesystem meant that margin was notenough for Mrs Clinton to win theelection.

As American journalist AlecMacGillis tweeted recently, Mrs Clin-ton’s national 2.7m-vote margin wasequivalent to the population of Chi-cago.

And what of the 80,000 vote-mar-gin in three important swing states —Michigan, Pennsylvania and Wiscon-sin — that took Mr Trump to victory?That is about the same number ofpeople that it takes to fill a US sportsstadiumonanygivenweekend.

Does that matter given Mr Trump’svictory and the new realities hebringswithhim?

Well,yes.According to Brookings research-

ers, the 472 US counties that sup-ported Mrs Clinton in the 2016 elec-tion generated almost two-thirds oftheUS’seconomicoutput.

Cities also, according to Ivo Daal-der, president of the Chicago Councilon Global Affairs, represent what weshouldstart seeingasemergingglobalpowers and the emerging defendersofglobalisation.

Put another way — what ishappening now is the return of thecitystate.

Mr Daalder is a former US ambas-sador to Nato and served in the WhiteHouse during the presidency of BillClinton.

He is an interested party. However,he also presents a compelling case forthe political battles in thewestern world today being notabout right vs left, but between advo-

cates of open or closed economies.Cities like Chicago, he argues, areglobal players that thrive on open-ness.

The Windy City is the world’sfourth-largest Mexican city, in termsof the ethnic origin of its inhabitants,andhas longbeenhometoavasteast-ernEuropeanpopulation.

Its orchestras and museums sur-vive thanks to its embrace of the art-ists that come from across the globe.

Its world-class universities have glo-balalumninetworks.

“Cities are the refuge now of thecosmopolitan citizenry,” Mr Daaldersays. He argues that cities are going tobe the “first anchor of resistance” tothose who want to close borders andlimit exchanges of culture, goods orpeople.

There are already signs of thatresistance. Soon after Mr Trump’selection, thousandsofprotesters tookto the streets in Chicago. Echoingleaders of other leading cities, RahmEmanuel, the mayor, has promisedthat Chicago will continue to be a“sanctuary city” for immigrantsdespite the incoming Trump admin-istration’s vows to round up illegalimmigrants.

“Chicago has been a city of immi-grants since it was founded. We havealways welcomed people of all faithsand backgrounds and, while theadministration will change, our val-

ues and our commitment to inclusionwill not,” Mr Emanuel declared soonafter theelection.

That revolt is just getting started.But there are other underlying rea-sons to be hopeful for cities — and glo-balisation.

Although the overall number ofpeople living in Chicago has beendeclining, the population in its down-town areas has been growing rapidlyas young professionals and retireeshave fed demand for residentialdevelopments.

That inner city residential revivalmirrors a trend in other US cities.Even second-tier cities are seeingmore people choosing to live in theirinner cores rather than suburbs orsurroundingareas.

Cities like Chicago have higher pro-portions of better educated residents.Some 70 per cent of high school grad-uates in the US pursue a tertiary edu-cation of some kind and polls showthat people’s support for world tradeand globalisation grow as theybecome more educated and betterable tocompete inaglobaleconomy.

Such trends did not help thedefendersofglobalisation—andopeneconomies — prevail politically in2016 and much damage could still bedone by the surging populists. But it istoo early for advocates of opennessdespair. Those very same trendscould well be enough to ensure theworld has a more open future than weareproneto imaginenow.

The rise and revolt of the city stateNew order Like manyother leading cities,Chicago is a globalplayer that thrives onopenness, writesShawn Donnan

Signs of resistance: Anti-Trumpdemonstrators join otherprotesters in ChicagoBilgin S. Sasmaz/Getty Images

‘Chicago has been acity of immigrants since itwas founded’Rahm Emanuel, Chicago mayor

FINANCIAL TIMES Friday 16 December 2016 FTReports | 5

Doing Business in Chicago

When Jim Boccarossa metStephanie Murphy, he did notknow anything about the avia-tion industry. She had spent 10years in the business, however,brokeringspareparts.

“We were dating and I foundit very interesting that it mightbe the biggest small industryyou’ve never heard of,” hesays. He also, he adds, foundthat the system the aerospaceindustry used for buying andsellingparts“archaic”.

The participants includedwell known groups such asBoeing, Airbus, GE and Hon-eywell — some of the biggestcompanies in the world — butthey were “buying and sellingparts using technology fromthe 1980s”. Mr Boccarossa hadfounded a few start-ups and heand Ms Murphy sensed achancetocombineexpertise.

Two years ago, Ms MurphylaunchedAirSparesUnlimited— an online brokerage forlanding gear, wheels andbrakes — and brought in MrBoccarossa, now her husband,tobe itschiefexecutive.

The company is one of manythat form the core of the tech-nology scene in Chicago, whichtends to tilt away from theglamorous social media appsof the US coasts, and towardstart-ups serving other busi-nesses or the industries thathave deep roots in the region,such as manufacturing andlogistics. Even the better-known Chicago-born Grou-pon, the site which offers dailydeals on goods and services toretail customers, has strongconnectionstothecity’scorpo-

rate past. It is housed in theformer home of MontgomeryWard, the mail-order cata-logue giant that was an ante-cedent toecommerce.

One reason for the Chicagotech scene’s low-key approach,Mr Boccarossa says, is thattechtalent inthecityhas“real-isticbusinessexpectations”.

“They understand that thisisn’t building an app so I cantake a picture to send to myfriends; this is building soft-ware so people can buy wheelsto land a plane,” he says.“We’re building real B2B tech-nology . . . you have real com-panies here who look at realrevenue streams to solve real-lifeproblems.”

Linda Darragh, who taughtMr Boccarossa at the Innova-tion and Entrepreneur Initia-tive at Northwestern Univer-sity’s Kellogg business school,says the diversity of Chicago’seconomy — in which no indus-try accounts for more thanabout 15 per cent of city GDP —isa leadingdriver.

“I see Chicago as basically aPetri dish for entrepreneurs totest and build tech-enable-ment for existing establishedindustries, so you start looking

at what industries are in Chi-cago, it’sallover theplace—it’severything from healthcare totransportation,” she says. “Sothere’s a lot of opportunity toreally get into the ecosystem ofan industry and improve uponit.”

UI Labs provides thosekinds of opportunities. It is apublic-private, non-profit“innovation accelerator” that

receives funding from majorindustrial companies such asCaterpillar, GE and Deere, andfrom the government. Onefocus, says Caralynn NowinskiCollens who heads the organi-sation, is manufacturing. UILabs is running more than 30industrial projects through itslabsandits factoryfloor.

“We have so many legacystrengths in old-line legacyindustries — not the sexy ones,but things like construction ormanufacturing,”shesays.

The city has bolstered thoseroots with over 100 entrepre-neurial environments, includ-ing accelerators, incubators,co-working spaces and inno-vation hubs, says Mark Tebbe,chair of Chicago Next, a tech-focused group connected tothe city’s economic develop-mentorganisation.

The group has createdindustry-specific incubatorsfor financial technology linkedto Chicago’s long history withthe futures industry, withwater — given the city’s placeon the shores of Lake Michigan— and with manufacturing.“You have a diversified base ofbusinesses [and industries] towork with,” says Mr Tebbe, aformer tech entrepreneur.“This makes for a strong cus-tomer base — if you’re astart-uporatechcompany, theone thing you need is a payingcustomer and there’s a lot oftheminChicago.”

Jodi Navta, chief marketingofficer for Coyote, the logisticscompany that last year wassold to UPS for $1.8bn, agrees.“Being the epicentre of theMidwest is good for a lot of rea-sons: there are a lot of busi-nesses that we can help locally,a lot of carriers that we canbuild relationships with thatare local,”shesays.

A diversified business land-scape gives rise to companieslike SMS Assist, which in Juneraised $150m from GoldmanSachs Investment Partners,

giving it a $1bn valuation. SMSmanages 25,000 propertymanagement subcontractorsto over 135,000 customers.“You wouldn’t think of a main-tenance company with 100 to150 code-writing technolo-gists,” says its chief Mike Roth-man.

Four Kites is a logistics com-pany founded by Matt Elen-jickal, who spent years work-

ing in supply chain manage-ment. He says one reason suchlow-glamour companies havetaken off in the city is becauselocal venture capital firms arewilling to take risks on busi-nesses that may not generateheadlines.

“There are a lot of VC firmsin Chicago who really focus onB2B, who focus on these indus-tries thatarenotsexy,”hesays.

Start-ups findthat focus onB2B clientspays off

Tech scene

Innovative appsaddress real-lifeneeds in the city’straditional industries,explains Neil Munshi

Combined expertise:Stephanie Murphy andJim BoccarossaMatthew Gilson

‘If you’re a start-upyou need a payingcustomer, andthere’s a lot of themin Chicago’

6 | FTReports FINANCIAL TIMES Friday 16 December 2016

Doing Business in Chicago

When the Chicago MercantileExchange launched its elec-tronic transaction system, itschosen name of Globex was aclear indication of how it sawthebusinessdeveloping.

Globex allowed people any-where in the world to buy andsell futures as easily as thetraders shouting in Chicago’soctagonal pits. The technologyalso signalled the beginning ofthe end of the open outcry sys-tem that had been operating inChicago since the 19th century.

Yet, while the marketplaceshave largely become virtual,Chicago has retained its role ascapital of the listed derivativesindustry.

The metropolitan area has45,000 jobs in derivatives andrelated sectors — whichincludes trade in futures con-tracts and other financialproducts — about the same as15 years ago, according to theIllinois Department ofEmploymentSecurity.

Including programmers,

lawyers, accountants andother people in the servicesindustries, the derivatives sec-tor probably employs tens ofthousands more, industryexecutivessay.

It has survived becausemany of the traders and bro-kers who learnt their businessin the pits stayed on andembraced digital change. CMEalso acquired its crosstownrival, the Chicago Board ofTrade,andcompetitors inNewYork and Kansas City to

become CME Group, a futuresmarkets titan.

The headquarters of propri-etary trading firms such asJump Trading, DRW, AllstonTrading, Peak6, Spot Tradingand Ronin Capital can all befound in a two-mile radiusaround the centrally locatedChicago Loop district. Proprie-tarytradersrisktheirowncap-ital in markets from interestrates to oil and often generatet h e m o s t v o l u m e o nexchanges.

“Many of the firms that werefounded here have their rootsin the pits, but we’ve all foundways to use technology to dothis better,” says Donald Wil-son, chief executive of DRW,which he established in 1992,the same year that Globex waslaunched.

Many large independentfutures brokers have chosenChicago as their base, includ-ing ADM Investor Services, RJO’Brien Associates, andRosenthal Collins Group.

City retains role as capital of derivatives industryTrading

Open-outcry pits arebecoming a thing ofthe past, but theexpertise has stayed,says Gregory Meyer

F or decades, Midwestern USbusinesses fled to verdant,antiseptic suburbs frominner cities blighted by grit,crimeandracial tension.

Corporate-led white flight fed thedescent of the great “rust belt” citiesintopovertyandviolence.Now, incit-ies like Chicago, however, that trendisbeingreversed.

Businesses that moved away whenit was all the rage to buildsprawling corporate campuses wherethe grass is green and the schools aregood, are moving back downtown,because that is where all the millenni-alsare.

In less than a decade, 50 companieshave moved their headquarters todowntown Chicago — some of them,

for example McDonald’s, after dec-ades indistant locations.

InthecaseofMcDonald’s, that loca-tion has been Oak Brook, Illinois, asuburb of Chicago. The burger giantstarted life in the city in 1955 and itsheadquarters remained there until1971. By 2018, it will move headquar-ters back downtown, to the trendyWestLoopareaofChicago.

McDonald’s is only one of a numberof high-profile moves. Motorola Solu-tions, the telecoms group whose glo-balheadquarters left thecity40yearsago, returned in August. Kraft Heinz,which started selling cheese to Chi-cago merchants in 1903, has movedits headquarters back downtown.ConAgra Foods recently merged itsoperations in Omaha with its subur-

banIllinoisoffice tocreateanewheadoffice inChicago’s imposingMerchan-diseMartbuilding.

Companies deciding to movedowntown are not taking that deci-sion lightly. Suburban office spaceremains about half the price of down-town locations, says Paul Reaumondof CBRE, who has helped severalcompaniesmovetothe innercity.

Chicago government-fundedschools are among the worst in thenation and the city’s murderrate has jumped in the past year to itshighest level in nearly 20 years, withover 700 people murdered so far thisyear.

Still, educated young people con-tinue to flock to the city, not just fromtherestof theMidwest—wheremany

former industrial rust belt cities areexperiencing similar, if more limited,inner city revivals — but from moreexpensivecoastalcities, too.

Research conducted between 1990and 2010, by William Testa, directorof regional research at the FederalReserve Bank of Chicago, and Wil-liam Sander, professor of economicsat DePaul University, found that thepercentageofpeopleover25yearsoldwith a university degree in Chicagorose from 19 per cent in 1990 to 33 percent in 2010. Anecdotal evidence sug-gests that young educated people arestill favouring Chicago’s inner cityareas.

Part of the reason is that Chicago —despite its high but very localisedcrime rate — is a much nicer place to

Companiesfollowmillennialsdowntown

Relocation Trend of moving out to the suburbsis now being reversed, writes Patti Waldmeir

Chicago’s populationwith a college degree

Source: Testa & Sander (Economic Development Quarterly, 2016)

%

0

10

20

30

40

50

60

1990 2000 2010

All

White

Black

Hispanic

FINANCIAL TIMES Friday 16 December 2016 FTReports | 7

Doing Business in Chicago

Futures brokers provide cru-cial links between traders andlisted derivatives markets,helping to ensure that finan-cial commitments are met.CME says 70 per cent of itsclearing brokers are located inIllinois.

“You can feel it,” saysMichael Creadon, chief execu-tive of Traditum Group, a pro-prietary trader based in theChicago Board of Trade build-ing. “There’s still a very largetradingpresence inthecity.”

The network revolvesaround the exchanges, partic-ularly CME and the ChicagoBoard Options Exchange,respectively the world’s big-gest futures exchange and

largest US equity optionsbourse.

The majority of volumes atboth CME and CBOE are nowtransacted electronically. Butthe city retains business net-works of brokers, lawyers,accountants and the universi-ties with their academic spe-cialists in derivatives markets.Intercontinental Exchange(ICE), an Atlanta-basedexchange operator, also has anoffice and a data centre in thecity.

“By virtue of CME Group,CBOE and even ICE’s presence,there has been a concentrationmore than a dispersion ofactivity in Chicago,” says CraigDonohue, chief executive of

Chicago-based Options Clear-ing Corp and former head ofCME.

However deep their roots,Chicago exchanges threatenedto leave town several years agoafter the state raised the cor-porate taxrate.

Earlier this year, CME pro-tested against plans to imposea financial transaction tax toalleviate state budget prob-lems.

“A transaction tax will abso-lutely drive our customers andcustomers of other exchangesnot only out of the markets —but I assure you — out of Illi-nois,” Terry Duffy, CME chair-man, warned in written testi-mony.

Mr Duffy informed lawmak-ers that CME had just sold andleased back its data centre inthe Chicago suburb of Aurora,a deal that allowed it to movethe guts of the Globex systemto another state. “We have 28data centres to choose from,”hesaid.

Despite threatened depar-tures, Chicago remains a mag-net. When GH Financials ofLondon expanded to the USabout five years ago, thefutures broker chose Chicagofor itsbase.

“Almost everyone you meetwho lives here knows someonewho has worked in the mar-kets at some point,” says MrWilson of DRW. “And it’s

always been a place where youcould find success without apedigree or connections, aslong as you were willing towork hard and chase thingsdown.”

Bernard Dan, who previ-ously ran both the ChicagoBoard of Trade and Chicago-based proprietary trading firmSun Trading, says the city’sdense web of infrastructure,expertise and capital for theindustry is “very hard to repli-cate”.

“That’s really what has his-torically solidified Chicago asthe derivatives capital,” MrDan says. “In my judgment it’sgoing to continue, because thetalent’s there.”

‘Almost everyoneyou meet knowssomeone whohas worked inthe markets atsome point’

live than even 10 years ago, say localresidents. Mr Reaumond says thepresent corporate migration trendcan be traced back to 2011 or 2012,when Chicago began to rebound afterthe2008recession.

“It reflects the types of peopleemployers are now looking for: mil-lennials want different types of thingsfrom their employers, culture andconvenience are two very importantthings, and the idea of getting in a caror a train and transporting for anhour to the suburbs is, for many mil-lennials, a non-starter. They want towalk to work, take public transport,they want wellness facilities, space towork outside, yoga studios etc,” hesays.

“Call centres and functions that

don’t require the same talent poolwould stay in suburbs,” he says. Butwith millennials already accountingfor one quarter of the US workforce,and forecast to make up half of globalworkers by the end of this decade,many companies are choosing tocome to where the workers are, hesays.

Many of them are childless, sincemillennials are delaying childbearinglonger than previous generations —so the problem of poor inner cityschools does not affect them. Accord-ing to Prof Sander of DePaul Univer-sity, only 4 per cent of college gradu-ates living in and around the Loophaveschool-agedchildren.

As for older and more senior work-ers, many of whom have children in

good schools near the old corporateheadquarters, Greg Brown, chiefexecutive of Motorola Solutions, saysthat its city location meant it couldretain valued employees who live inthe suburbs, but it could also attractthedatascientists,designersandsoft-ware developers who live downtownthat have the expertise that Motorolais seeking.

“We wanted the energy, vibrancyand diversity of the city to help accel-erate a change in our culture,” headds.

Only 40 per cent of the company’sstaff are based downtown, while 60percentremain inthesuburbs.Thosewho live out of town can workremotely, using technology to con-nect with colleagues, or make the trip

downtown quickly using Chicago’sgood network of trains and subwaylines.

Some companies have moved onlypart of their workforce to the centreof the city. ConAgra still has twice asmany staff back in Omaha, where itsheadquarters were previouslylocated.

McDonald’s plans to move every-one,however.

Mr Reaumond says inner city areaswill continue to lure companies as themillennial share of the workforcegrows.

“I don’t see it slowing down,” hesays. The forces that attract big com-panies downtown appear as strongtoday as those that drove them togreenerpasturesdecadesago.

‘We wanted the energy,vibrancy and diversity ofthe city to help acceleratea change in our culture’

Central location: MerchandiseMart building (above); anarchitectural rendering ofMcDonald’s new headquarters(bottom left of image on left)Gensler/Getty Images

8 | FTReports FINANCIAL TIMES Friday 16 December 2016

Doing Business in Chicago

L astyear,Gogo, the in-flightinternetcompany,becamethe latestcorporationtomoveitsheadquartersfromthesuburbsto

downtownChicago, followingthelikesofMotorolaSolutions,ConAgra,andKraftHeinz.

MichaelSmall, chiefexecutiveofGogo,sayshiscompanyhadoutgrownitssuburbancampusand—inlookingfornewdigs—wasdrawntoChicago’sdeeppoolof techtalent.“Whenwewere lookingparticularlyforyoungtalentandsoftwaredevelopers, themarket for that isprincipally inthecityandIwouldsayingeneral there issuperior talent indowntownChicagothanyoucangenerallyrecruit inthesuburbs,”MrSmall says.

Chicagodrawsfromits threemainuniversities—Northwestern, theUniversityofChicagoandtheUniversityof IllinoisatChicago—aswellasmostMidwesternschools,includingtop-tierengineeringprogrammesatnearbyPurdueUniversityandtheUniversityofIllinoisUrbana-Champaign.

“We’vesuccessfullycompetedagainstall thebig-nameemployers,theGooglesandApplesandFacebooksof theworld,becausesomepeople,believe itornot,wanttolive intheMidwest,”saysMrSmall.

GogoprovidesWiFiserviceon2,700commercialaircraftand7,000privateplanes. It is facing increasedcompetitionfromcompaniesincludingCalifornia-basedViaSat,whichthisyear inkedcontracts toprovidesatellite-poweredinternetconnectivityon600newAmericanAirlinesplanes.Gogo’sownsatellite-poweredtechnology,2Ku,willbeusedbyAmericanon134planes.

MrSmall,however, isnotonlybusytryingtogrowhiscompany,healso

spendsmuchofhissparetimetryingtohelpsolveaproblemthat isperhapsthecity’sgreatestchallenge:gunviolence.

“Icametothegunissue in2000whenmythen11-year-oldsongotshot intheeyeandlosthissight[inthateye],”hesays, recallingtheincident inNewJerseywherehe livedat thetime.“SoIstarted learningabout itandbecamealittle involvedin it intryingtohelpthefamilygetoverthatsituation,andthenIwasquicklystartledbythegunviolenceproblemintheUS.”

MrSmallbecameactivewitha localanti-gun-violencegroup,andwentontoserveayearaschairmanof theBradyCampaigntoPreventGunViolence,oneof thecountry’smostprominentanti-gunviolencegroups,beforesteppingdowninJanuary.

HehassincedecidedtofocushiseffortsontheChicagoarea.“There’ssomereallygoodworkbeingdonebytheCrimeLab,which isaffiliatedwiththeUniversityofChicago,”hesays.MrSmalldonates to, sponsorsawareness-raisingdinnersonbehalfof,andhostsmeetings for, theCrimeLab,whichworkswithcivicandcommunity leaders to findouthowbest totacklecrimeandviolence.

Thehigh levelofengagement incivicactivitybybusinessesandbusinesspeople is,hesays,uniquetothecity.

“Insomecases insmallercities,there’saverysmallgroupthatrunsthings,”hesays.“Buthere it’sa fairlydiversegroupbut it’snotso largethatweall can’t thinklikewe’repartofonebig team.InNewYorkyou’re lost[inthecrowd].”

Chicago, longafflictedbyviolentcrime,hashadaparticularlydeadlyyear.Earlier thismonth, thecityhitadarkmilestonewhenthenumberofmurders for theyeartopped700,up

fromabout450killings for thesameperiod lastyear.Bycomparison,NewYork—whichhasmorethanthreetimesasmanypeopleasChicago—hadjustover300murders.

Morethan3,300shooting incidentswerealsoreported intheyeartoDecember4,upnearly50percentfromabout2,250recordedinChicagooverthesameperiod lastyear.

“Unfortunately,wearethepostercity for thegunviolenceproblem,eventhoughourmurderrate isnotthehighest inthecountry,”saysMrSmall, referencingthefact thatotherbigcitieshavehigherpercapitamurderrates,althoughtheyhavelowerabsolutetotals. “But . . . wehavethemostgundeaths intheUSandsoweget thatunfortunatecrown.”

Chicago isamongthecountry’smostsegregatedcities,andneighbourhoodsonthepredominantlyAfrican-AmericanandHispanicsouthandwestsides

thathave longstruggledwithpovertyandgangactivitysuffer thebruntofitsgunviolence.

Afterhisson’sshooting,MrSmallsayshe“startedworkingtotrytosolve itand, likea lotofpeople, Ithought there’sgot tobeawaytodothisandquickly learnedjusthowintractable[theproblem]is”.

While thesituationmayseemhopeless, thepast fiveyearshasseenasurge infundingforgunviolencepreventiongroups includinginitiativessuchasEverytownForGunSafety, foundedbyMichaelBloomberg.“This isno longeraone-sideddebate,”saysMrSmall.

“It’sauniquelyAmericanproblem—wejustseemtohavea lotmoregunsandalot fewerrulesaboutguns,”saysMrSmall.Hepoints thatover30,000peoplearekilledbyfirearmseachyear intheUS.“Youdon’thavetowait forverymanyyearsbefore it’saprettyastonishingnumber.”

From WiFi inthe skies togun crime onthe ground

Interview Michael SmallGogo’s chief on the city’s best and worstpoints. By Neil Munshi

Michael Small:there issuperior talentin downtownChicago thanyou can recruitin the suburbsMatthew Gilson

‘I came tothe gunissue in2000 whenmy then11-year-oldson gotshot in theeye’