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this may all be true and therefor leads a trader in these futures to use options
as a hedge and not depend on stops. With options a defined risk can be obtained
with little or no slippage if used properly. There is the argument that most of
the old-timers in the pits don't understand options, don't want to know about
them, and will stand by the good old boy network they have used for years. In
shallow markets it becomes easy to run stops and manipulate price action to a
certain degree. If run to far out of line, then the big boys come to play, so
they do use care. Good trading, Ira
I4Lothian@xxxxxxx wrote:
> Be on the lookout for liquidity air pockets in the grain and soybean futures
> complexes in the coming months due to a reduced number of traders in the CBOT
> futures pits due to the attractiveness of trading at the CBOE.
>
> Some facts and some thoughts:
>
> A Full CBOT membership traded today for $490,000. The cost to lease the seat
> is $7200 per month.
> A CBOT Associate membership recently traded at $197,000. The lease cost is
> $2500 per month.
> A CBOT COM membership recently traded at $58,000. The lease cost is $550 per
> month.
>
> With a Full membership, a trader can trade anything on the CBOT or at the CBOE
> if they have passed the proper classes and have the proper registrations.
>
> With an Associate membership a trader can trade all the financials at the CBOT
> and on the Midam financials.
>
> A COM (Commodity Option Membership) allows traders to trade financial or
> agricultural options.
>
> Owning an Associate membership and leasing it out reflects a return of
> approximately 15% ($2500 x 12) / $197,000. The return on the Full is about
> 17%.
>
> The Associate membership price reflects 40% of the value of the Full
> membership
> price. Extrapolating the 40% value to the lease prices for Associate it would
> reflect a lease rate of $6250 for a Full membership. However, the Full
> membership is leasing for $7200, almost $1000 more.
>
> I think this premium reflects demand for the Full memberships in order to
> utilize their CBOE trading rights. Given the current sluggish activity in the
> grain futures pits and the number of traders physically present in the grain
> futures pits these days, I would not assign this value to merit of being able
> to trade the grain futures markets.
>
> Since we are approaching the Holidays and winter, this skewed relationship
> could cause more Full memberships to be put into use over at the CBOE as
> membership become available for lease over the winter.
>
> One of the strengths of the CBOT has always been the depth of the locals in
> the
> pit and their ability to make markets. With the stock market racing this way
> and that, the opportunities at the CBOE may well attract more and more
> memberships away from the futures floor of the CBOT. This type of stock
> market
> volatility was made for options traders.
>
> On the other hand, the skewed lease rate for the Full membership and the
> narrow
> trading of the grains may force some traders out of the pits. It could also
> have an effect on the supply and quality of filling pit brokers in the
> futures.
> With the cost of the lease higher, it is that much more volume each broker
> needs to do to make a living. And volume is down. Consolidation will be
> occurring as brokers abandon their decks. Or, some of these brokers will be
> replaced with newer inexperienced brokers who are willing to accept less in
> the
> way of income.
>
> When the grain futures do have spurts of activity, things could get ugly price
> action-wise and fill-wise due to the volume of orders flowing through fewer
> and
> less experienced hands.
>
> Regards,
>
> John J. Lothian
>
> Disclosure: Futures trading involves financial risk, lots of it!
>
> Disclosure: John J. Lothian is the President of the Electronic Trading
> Division
> of The Price Futures Group, Inc., an Introducing Broker headquartered in the
> Chicago Board of Trade building.
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