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I think your analysis of the problem is real. I think you miss the real issue as
to why seat lease prices are so high and what is actually evolving in the trading
community.
Leases are high because the users are afraid to own seats given the uncertain
future of physical floor trading. A great majority of the seats are owned by
"nonusers" (often former users or simply seat speculators holding the seats for
income). the uncertainty is so high that floor users will pay to lease so as to
avoid the risk of ownership. Ownership risk is twofold, especially at the CBOT.
The risks are seat price decline and the other big issue at the BOT is the
assumption that a technology tax would be imposed on the seat owners. So in
effect you have an environment where people will pay anything to lease so as to
conduct their day to day business ... and not have to own.
I4Lothian@xxxxxxx wrote:
> 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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