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Months ago I wrote on RT and some other forums about how CBOT membership
lease prices were trading at premium levels reflecting the demand for Full
CBOT membership badges to trade over on the CBOE. Full CBOT memberships are
now leasing for $10,355. This is up from the $7,000 rate I quoted months
ago, indicating the problem is only getting worse.
Essentially here is the problem. Here are two examples:
1) A floor broker owns a membership and acts as a filling broker in the
soybean pit executing customer orders in the back months. The broker has
order risk and maybe a clerk salary to pay. Volume has dropped and the
broker is not making money and may be actually losing money. This member can
then lease out their seat and make a cool $120,000 per year with no error
risk. Additionally, this member can then go out and take a new job and try
to earn a living doing that. Given that the threat of electronic trading does
not bode well for the careers of floor brokers it might be a good idea to not
wait until the last minute to learn some new skills.
So now we have lost a floor broker and when the member leases the membership
it is likely to go over to the CBOE rather than stay at the CBOT.
2) A floor broker leases a membership and acts as a filling broker in the
back months of wheat. With lease costs escalating and volume dropping, while
other costs (clerks) remaining the same, the floor broker is probably
breaking even or even losing money. The prospects for a volume increasing
bull market look particularly dim in all the grains and the soybean complex.
What to do? They could trade their own account, but these may not be the
type of conditions for that type of activity.
The economic pressures and opportunity costs are putting pressure on the back
month brokers and marginally profitable pit traders. Taking the easy lease
money for members who own their seats looks like a much smarter thing to do.
This is going to create problems in the back months especially if there are
no brokers who can make a go of it. Or even if there is one who can, they
will have all the volume, which could lead to execution and efficiency
problems.
The CBOT could switch back months to an electronic system, such as Project A
or eventually the Eurex interface. But this will hurt volume in the front as
the spreaders will not be able to lay off risk easily by hitting the broker
bids and offers in the back months.
The CME is going to side by side trading in the Euros and has introduced
handheld units which will allow pit traders to interact with Globex2 markets.
But so far the CBOT has not introduced such technology and it would probably
be months away. That may not be soon enough to stave off the problems
outlined above.
The CBOT could change the membership categories to facilitate putting more
people in the grain pits, but that seems unlikely. I really don't know what
the right answer is, or even if there is one. Certainly technology issues
and political concerns are problematic for any answer.
The moral of the story is to focus your trade in the front month where the
volume is.
This is not a problem in the CBOT option pits as COM seats are plentiful and
leasing for a paltry $325 per month.
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.
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