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Categorized | Financial

CME pit closure sparks member buyout call

Posted on February 10, 2015

In this Sept. 24, 2014 photo, traders work in the ten-year bond pit on the floor of the CME Group in Chicago. Main Street investors have poured a trillion dollars into bonds since the financial crisis, and helped send prices soaring. As fund managers and regulators fret about an inevitable sell-off, the bigger fear is that when people go to unload, there won’t be anyone to buy. (AP Photo/M. Spencer Green)©AP

The demise of futures trading pits in Chicago and New York has triggered debate over exchange membership, a privilege some now view as a burden in an era of electronic markets.

A membership gave traders and brokers access to the once-bustling trading floors of CME Group, the biggest futures exchange operator. CME last week announced it was closing most open-outcry futures trading, abandoning a tradition dating to the 19th century.

    But memberships are to survive, prompting pointed questions to CME executives at a member meeting last Friday, attendees said. More exchange members are scheduled to see the executives in New York on Wednesday.

    Ray Cahnman, chairman of TransMarket Group, a prominent Chicago-based proprietary trading firm, told the FT that memberships were a “throwback to when the pits were the main thing. Now they’re not. So you should find a way to reduce them.”

    Pat Mulchrone, a founding partner of broker Advantage Futures, said CME should buy out members’ stakes.

    “I think it’ll make the exchange stronger in the long term,” Mr Mulchrone said.

    Members are still entitled to discounts on exchange fees even if they trade electronically. But memberships can cost millions of dollars as traders must buy or lease at least one for each CME exchange they use, including the Chicago Board of Trade and New York Mercantile Exchange.

    Mr Cahnman said the membership system gave CME a “more complicated fee structure” than competing exchanges such as Intercontinental Exchange and Deutsche Börse’s Eurex, threatening its appeal as a trading venue.

    The decision to close futures pits will reduce demand for memberships as individual floor traders exit, said Mr Cahnman, a member and CME shareholder.

    It would be a big plus to CME stockholders if access to the lowest exchange rates was available without requiring the added burden of owning memberships

    – Ray Cahnman, chairman of Transmarket Group

    “With only limited demand for memberships offset by a very large supply of unleased memberships, the CME board has an opportunity to make a tender offer for memberships at prices that are viewed as beneficial to CME stockholders,” Mr Cahnman said. “It would be a big plus to CME stockholders if access to the lowest exchange rates was available without requiring the added burden of owning memberships.”

    As CME became a for-profit company and acquired other exchanges, it compensated members as they ceded some of the rights of owning a seat. Each member of the Nymex got $750,000 when CME took it over in 2008, for example.

    Buying out all of CME’s 3,138 “class B” memberships could cost more than $1bn at current prices, industry executives said. CME said in response to an FT query: “Like all of our customers, class B shareholders provide important liquidity.”

    Dozens of memberships are available for lease on the CME website, while only a handful of applicants were recently seeking new memberships. A full membership on CME’s Chicago Mercantile Exchange sold for $720,000 on Friday, down from $785,000 in mid-January.