|
PureBytes Links
Trading Reference Links
|
Here is another interesting article on electronic trading pressures at the
pressures at the CBOT.
The writing is on the wall... IMHO.
Neil
|
| Dow Jones Newswires -- July 24, 1998
|
| Options Traders Play Musical Chairs For Arbitrage Profits
| By STEVEN M. SEARS
| Dow Jones Newswires
|
|
| NEW YORK -- Call it the LaSalle Street arbitrage.
|
| Options traders, who usually make their money
| through puts and
| calls on stock and index contracts, sometimes use their
| skills in a very
| different market.
|
| When prices are just right, some of them make
| money trading
| Chicago Board Options Exchange seats against Chicago Board
| of Trade seats.
| By selling, buying or leasing the two seats, traders said
| they can make
| $50,000 to $80,000 in an average transaction, offsetting the
| significant
| expense of maintaining a seat. They call this seat arbitrage.
|
| The membership seat prices are linked because
| the CBOE was
| founded in 1973 by Board of Trade members who wanted to
| maintain access to
| the new exchange that was eventually housed in its own
| building on LaSalle
| Street. A CBOT full-member has the right to trade every
| product at that
| exchange and options at the CBOE.
|
| Seat prices at both exchanges have lost much of
| their value
| this year because screen-based derivatives trading threatens
| to overthrow
| the old order. Trading is now conducted in an open outcry
| market, where
| people stand in a pit and shout and use hand signals to trade.
|
| About 3% of the CBOT order flow is completely automated,
| compared with about 80% at the CBOE.
|
| For several weeks, CBOT full-membership seats
| have traded at a
| discount to a CBOE full-membership. These CBOT seats
| historically cost as
| much as $150,000 more than CBOE seats.
|
| The seat prices at both exchanges are sharply
| below 1998 highs.
| The CBOT full-membership seat price is down 47% from its year-high of
| $780,000 on March 24. CBOE seat prices are down 40% from a
| March 11 high of
| $750,000.
|
| The most recent full-membership seat at the CBOT sold for
| $410,000 on July 17, compared with three CBOE seats that
| sold for $430,000,
| $435,000 and $450,000 on July 7.
|
| During this recent slide in seat prices, some
| CBOE traders sold
| their CBOE seats to buy less-expensive CBOT seats, said Jon Najarian,
| chairman of Mercury Trading, a Chicago trading firm that
| owns two CBOE
| seats and leases 34 others. These traders turned an easy profit.
|
| "That arbitrage between people buying the board
| of trade seat
| and selling the CBOE seat has pushed our CBOE seats down in a married
| fashion with theirs because every time one of their seats
| trades down some
| CBOE lessor will take a chance and buy the board of trade
| seat in hopes of
| selling the CBOE bid and thereby making a profit," Najarian said.
|
| In the seat market, a CBOT full-membership is
| currently bid at
| $405,000 and offered at $430,000, while the similar CBOE
| membership is bid
| at $440,000 and offered at $540,000.
|
| Another seat arbitrage traders sometimes use is
| to buy a CBOT
| seat when it doesn't cost much more than a CBOE seat. The
| trader sells the
| CBOE seat and waits for the CBOT seat to trade at a higher
| premium, which
| has historically ranged from $20,000 to $150,000. When the
| spread widens
| like this, the CBOT seat is sold and the CBOE seat is repurchased.
|
| A CBOT spokesman declined to comment on the
| effect his exchange
| has on CBOE seat prices, but he noted that CBOT chairman Pat
| Arbor said the
| drop in CBOT seat prices is an overreaction to the threat of
| screen-based
| trading.
|
| "It is necessary to understand that our seats
| and the board of
| trade's seats are directly linked because of the exercise
| right that a full
| seat has at the CBOE. We currently have almost 500 of those
| seats that are
| in use at the CBOE," said William Brodsky, the CBOE's
| chairman and chief
| executive, who otherwise declined to comment.
|
| For traders who don't want to buy or sell seats, there's
| another form of arbitrage. This one involves taking advantage of the
| discrepancy between monthly seat lease prices on the CBOE and CBOT.
|
| A CBOE seat is more expensive to lease than a CBOT seat,
| primarily because it's more difficult to become a CBOT member. So an
| options trader would lease his CBOE seat to someone else for $5,000 a
| month, for example, and then lease a CBOT seat for an amount that is
| usually $500 to $1,000 a month less.
|
| One of the beneficiaries of the decline in seat
| prices has been
| traders who lease their seats, but don't engage in the seat
| arbitrage.
| Mercury Trading's Najarian, who leases the majority of his CBOE seats
| because of the threat of screen-based options trading, said
| he's saving
| substantial sums of money.
|
| Since March, when seat prices began trending
| lower, the cost to
| lease a CBOE seat has fallen to $4,700 a month from $9,000,
| said Najarian,
| who uses his $120,000 a month in savings to increase his
| firm's trading
| activities.
|
| Even though CBOE seat owners could lower their
| seat expenses by
| selling their seats and buying a CBOT seat, few, if any, are
| now willing to
| make the trade, options traders said. The fear is a rumor
| that the CBOT may
| require members to pay extra money to defend the exchange from Cantor
| Fitzgerald LP's deal with the New York Board of Trade to start an
| electronic futures exchange.
|
| "Some people may take a CBOE seat even though a
| CBOT seat is
| cheaper because of fears of an assessment at CBOT," said a
| CBOE seat owner
| who has twice arbitraged his seat against a full-membership
| at the board of
| trade.
|
| The CBOT said it isn't planning to levy an
| assessment on its
| members.
|
| Rick Bruder, who owns a CBOT seat and trades at
| the CBOE, isn't
| worried about assessments and doesn't plan to sell his seat.
| He said the
| CBOT can charge him more money if it gives him the
| opportunity to make more
| money.
|
| Bruder said seat prices are a non-issue. "It's
| kind of like
| worrying about the pennies and letting the dollars lie in
| the gutter," the
| trader said, adding that CBOT seat-owners are more concerned with
| progressive thinking.
|
| Futures exchanges in England, France and Germany
| have embraced
| screen-based derivatives trading. At the French futures
| exchange, Marche a
| Terme International De France, for example, almost all trading volume
| migrated to the screen-based trading system after it was
| introduced in
| April. Matif has since shut down its floor-trading operation.
|
| The CBOT, however, is perceived as not being receptive to
| technology. When the exchange built a new building in
| February 1997 to
| trade all financial products, preserving the open outcry market was a
| consideration.
|
| "The CBOE and board of trade operate in
| different worlds. The
| CBOE has embraced electronics and exploited them to every
| one's advantage.
| Across the street, they just paid $180 million to build a
| building for new
| products and the biggest argument was line of sight for hand
| signals," said
| the CBOE seat owner.
|
| -By Steven M. Sears; 201-938-5355
|
| Return to top of page | Format for printing
| Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
|
|