Chicago traders revolt at change in CME rules

Chicago pit traders are up in arms against a CME Group plan to use electronic trading to set grain and livestock closing prices, a move they fear will drive another nail in the coffin of open-outcry dealing.

CME Group, already under fire from many traders for its delay in getting money returned to customers after the October bankruptcy of brokerage MF Global, said that next March or April it would begin incorporating deals from its electronic Globex trading platform into final prices.

For many, the change appeared an inevitable reflection of the growth in electronic trade, which now accounts for the vast majority of transactions on both the Chicago Board of Trade, the world’s biggest grain exchange, and the Chicago Mercantile Exchange, which offers contracts tied to cattle and hogs.

But to the cadre of pit brokers and dealers who thrive on the final frenetic minute of floor trading used to set the official end-of-day prices, the change was a rallying cry to defend a way of life that is nearly extinct.

"Are we going to sit here and be kicked in the teeth? Or are we going to fight back?" shouted Alan Young, a cattle broker who helped organize a raucous "Occupy the Pits" meeting of about 100 brokers and traders around the cavernous Chicago Board of Trade (CBOT), birthplace of the modern futures markets.

"There will be a snowball effect if this thing goes electronic, and there won’t be any more jobs left."

Dealers say the settlement process has helped preserve the floor, even as other open-outcry pits around the world are shuttered in favour of quicker and cheaper electronic trading. Many pit traders hung up their brightly coloured jackets after CBOT launched side-by-side electronic and open-outcry trading in 2006.

Julie Holzrichter, a managing director at the CME, told the group that with the majority of trade now being conducted electronically, it is not fair that settlements should be made only on the basis of pit trades.

"We have two venues and we have never pushed our customers one way or the other," she said. "Things are done because they are in the best interest of the exchange," she told the group.

The meeting in the cattle pit was drawing to a close as lawmakers in Springfield, Illinois gave the green light to a measure that would cut CME’s annual tax bill by US$85 million in a bid to keep the exchange operator from leaving the state and taking its 2,000 jobs with it.

The exchange said it would release details of the new rules and timelines for the roll-out early in 2012. The transition to the new rules will occur in March and April, subject to review by the U.S. Commodity Futures Trading Commission.

The CME Group’s changes will apply to CBOT corn, soybeans, soyoil, soymeal, oats, wheat and rough rice futures as well as CME live cattle, feeder cattle and lean hog futures.

"Wounded animal"

Some traders said they had been amazed that the floor-based settlement mechanism had persisted so long. With more and more volume being transacted on the "screen" rather than the "floor," the roar from the pits in the final minute of the trading day appeared increasingly anachronistic.

Most of the rest of CME’s contracts are already settled using electronic prices.

"I’m really surprised it’s taken this long to include data from electronic trade," said Sterling Smith, market analyst for Country Hedging at St. Paul, Minn. "I do think this is for the best and I do support this. Pit traders are understandably upset and like any wounded animal it fights back."

The shift toward electronic trading in agricultural contracts has gathered pace this year. In the first 11 months, total open outcry trading in commodity and alternative investment products — including New York oil and metals contracts — fell 18 per cent, while electronic trading rose nearly 38 percent, CME data shows.

In all, "pit" trade was just over a quarter of the total volume, down from almost half in 2010. But it accounts for the vast majority of trading in the last minute of the day.

— Additional reporting for Reuters by Sam Nelson and Theopolis Waters.

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