CFX Article

Chicago, FinTech and Financial Market Innovation

As we’ve discussed before, technology is having a massive impact on the world of private placements. Technology is disrupting a number of other industries, though, and one of them is the financial services industry. Chicago is one of the cities at the epicenter of the FinTech revolution. This shouldn’t be surprising, because Chicago has always led the way in financial markets innovation.

History of the Chicago Financial Markets

The Chicago Board of Trade (CBOT) was originally established in 1848. Given Chicago’s location in the Midwest and at the base of the Great Lakes, it was (and still is) a natural hub for transporting and trading agricultural produce. The development of railroad and telegraph lines helped connect Chicago with the East and made it a center for commercial activity. The CBOT was established to give farmers and dealers a central place to exchange cash for produce, primarily wheat.

At the time, farmers would grow their crops and bring them to market without any indication of demand, often resulting in supply exceeding demand. This led to the birth of the “futures” contract in Chicago in 1865, as farmers and dealers began to commit to future exchanges of grain for cash. This allowed farmers to know in advance how much they would be paid for their grain, and allowed dealers to calculate their expenses in advance. Of course, it wasn’t long before speculators began buying and selling these futures contracts themselves, creating a “secondary market” in futures.

Chicago is also the home of the Chicago Board of Options (CBOE). While options have been traded throughout U.S. history, they historically were not standardized and were highly illiquid. This changed in 1973 with the opening of the CBOE, which became the first U.S. options exchange. The CBOE provided a two-sided market for options buyers and sellers, and helped popularize options as an accepted form of investing.

Modern-Day Chicago FinTech

Given this history of financial innovation, it shouldn’t be surprising that Chicago has emerged as a leader in the FinTech industry. FinTech is the name given to financial service companies whose products and services are based upon technology. Global investment in FinTech companies grew from $928 million in 2008 to $2.97 billion in 2013, and is expected to reach $6 billion by 2018. Some industry analysts credit this growth to new financial regulations that FinTech companies have been able to navigate easier than larger banks have.

One of Chicago’s most well-funded startups is Avant (formerly AvantCredit), which uses complex algorithms to match borrowers with loans. OptionsCity is an electronic trading software platform that allows traders to combine OptionsCity’s open API with the trader’s own proprietary technology. On the B2B side, Rippleshot uses predictive technology to help companies detect looming data breaches. These are just a few of the many Chicago companies that are bolstering the city’s reputation for innovation in the financial markets.

CFX: The Next FinTech Innovation

Of course, we’re doing our part to spur further innovation in the financial markets. When we began building the CFX Network last year, we believed that there would be great investor demand for high-quality commercial investment opportunities, particularly in the Midwest markets that have been underserved by other crowdfunding platforms. The equity crowdfunding industry is still relatively new, but we’ve been thrilled at the response we’ve received from investors for the offerings in the CFX Network.

We always knew, though, that equity crowdfunding would not reach its full potential unless investors had the potential for liquidity in their investments. While building the CFX Network, we’ve worked simultaneously to develop a secondary market for crowdfunding offerings. CFX: Crowdfunding CrossMarkets, will provide an open and secure network to facilitate secondary market transfers of private securities in alternative asset classes. Shares of crowdfunding offerings purchased on the CFX Network portals can be resold on CFX (subject only to SEC resale restrictions). We expect to officially launch CFX in Fall 2015.

While investors in our current CFX Network offerings will be the initial beneficiaries, our vision goes beyond any one platform, and even beyond the crowdfunding industry. Put simply, we believe CFX will, in time, do for equity crowdfunding what the Chicago Board of Options did for options trading. While options trading existed prior to the CBOE, it was a very difficult and inefficient process. The CBOE provided a centralized, standardized options marketplace, opening this form of investing up to many new investors. We believe that CFX, by providing the option of liquidity, will open equity crowdfunding up to many new investors who otherwise would not be able to participate.

We can’t wait to launch CFX, so stay tuned for its official launch soon!