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Actually it is attempt to separate out the business of market making from the
business of seat ownership. It also allows the exchange to finance new
development or new technologies by allowing them to tap the capital markets for
cash. If you look at the securities industry(the CBOT is the futures industry -
but the issues are the same)transaction costs charged by the exchanged have
declined to a level of almost zero. Almost all stock trading is at zero or
involves a rebate and all options trading is at or near zero and may be going
toward a rebate.
Seats, themselves, provide no capital for a trader. A fully paid seat worth a
million dollars doesn't give you 1 penny of capital for trading purposes. So
most traders lease and most seats are owned by seat speculators - often the
estates or families of former owners - who's interest are purely the economics
of seat ownership ... not the economics of trading. The US is about the last
country where the exchanges are owned by their seat holders. In effect going
public would shift the economics of generating trading capital to owners as
opposed to users. It would also provide an economic opportunity for non user
owners.
The Goldman Sachs example is sort of classic. By going public they, in effect,
traded capital for their unique culture. Will it end up being worth it? You
can now speculate on Goldman's success or failure by trading their stock(or it's
derivatives). There overall costs are lower because they won't have to tap the
debt market for day to day money as much as they did before they went public.
Additionally their owners were able to monetize the value of their ability as
partners.
Seat prices in the US are arguably too high because the volatility of the
trading P/L makes very few traders want to commit capital to own. So instead
they pay "anything" to lease. A profitable trader in effect underpays for the
seat and a marginal trader overpays. The direct economics of the trader impact
the friction you pay as a user on the trading floor. Right now YOU finance the
trading function as a user - why not let the capital markets set that price?
RAY RAFFURTY wrote:
> Hi All RT's,
>
> If the exchanges go public, and members become owners, I assume current
> members would be given shares of stock, since they have already purchased
> their seat. This would be similar to partnership going public, i.e.
> Goldman-Sacks.
>
> Since it is natural for owners (former members) to want to make a profit
> while not paying for services, and since it is equally natural for large
> institutional investors to demand and get low fees, guess who will be asked
> to provide the profits and how.
>
> Do they really believe that small investors can afford to solely support the
> exchanges, especially in an extended bear market when they run for cover?
> After every major down market it has taken years for volume to come back to
> pre-crash levels. Imagine both a declining market and a reduction in
> volume. Will the exchange go out of business if it can not make a profit?
> File for bankruptcy? Get a government bailout?
>
> Good luck and good trading,
>
> Ray Raffurty
>
> ----- Original Message -----
> From: comdytrd <comdytrd@xxxxxxxxxxxxx>
> To: Real Traders Forum <realtraders@xxxxxxxxxxxx>
> Sent: Thursday, July 22, 1999 9:22 AM
> Subject: Fw: CBOT for Profit
>
> >
> > -Board of Trade considering reorganizing....of possible interest
> >
> > July 21, 1999
> >
> > Dear Fellow Member:
> >
> > The CBOT of Directors, at my urging, voted yesterday to begin the process
> of
> > preparing an exchange-restructuring plan, in order to allow us to better
> > realize the value of the CBOT to the members.
> >
> > The measure passed by the Board stated:
> > Adoption of a for-profit structure by the CBOT;
> > Demutualization, i.e., the separation of ownership (equity) and trading
> > rights of each membership;
> > Monetization of ownership component through private or public investment;
> > Preservation of existing trading rights (including the Full Member's CBOE
> > exercise right).
> >
> > Let me assure you at the outset that the plan we develop would eventually
> > have to be approved by the Board of Directors and of course approved by
> the
> > membership. I want to keep you apprised of important developments in the
> > process so that any eventual decisions by the membership are based on the
> > facts.
> >
> > There is still a tremendous amount of research and discussion necessary
> > before a specific for-profit restructuring plan is brought to the
> membership
> > for your consideration. However, the unprecedented competitive environment
> > we face dictates beyond doubt that we need to consider alternative
> > structures. We need the resources and flexibility to assure that our
> > customers continue to prefer using CBOT markets rather than our
> competitor's
> > systems. Frankly speaking, our current governance structure does not allow
> > us to enact decisions and mobilize financial resources with the speed
> > required in today's electronic marketplace. It worked well for 150 years,
> > but it is not the structure a company would use if starting a successful
> new
> > exchange today. We must face the realities in the global marketplace and
> > seriously explore the alternative.
> >
> > There will be a serious effort to assess the financial possibilities of
> any
> > restructuring. I believe we have a responsibility to find out what sort of
> > value could be placed on the CBOT's member's holdings. At this stage, we
> > should determine how to realize the value of a restructured CBOT, while
> also
> > maintaining all existing trading opportunities. The approach to be studied
> > would involve unbundling the trading privilege (including the CBOE
> exerciser
> > right) from equity ownership. The membership equity could then be
> monetized.
> >
> > I am committed to devoting time, energy, and resources to make sure that
> the
> > CBOT, and its members, are positioned to compete and grow in the 21st
> > century. A member Task Force (below) is charged with developing a plan for
> > the restructuring. They will participate in all aspects of the work
> > analyzing alternative structures and monetization opportunities.
> >
> > CBOT Restructuring Task Force:
> > David P. Brennan, Chairman
> > Charles P. Carey Joseph Niciforo
> > David J. Fisher Edmund J. O'Connor
> > David F. Goldberg James J. O'Connor
> > Neal E. Kottke Michael P. Ryan
> > Thomas E. Neal
> >
> > I will continue to report to you first-hand the progress we are making on
> > the restructuring and the pros and cons associated with change. In time,
> we
> > will hold meetings with members to further the communication process. As
> > always, the lines of communication remain accessible and open. Healthy
> > dialogue will make sure that we leave no stone unturned in our search for
> > the best answers.
> >
> > Sincerely,
> > David P. Brennan
> >
> >
> >
> >
> >
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