Chicago Board of Trade seat sales hot despite chill on floor

Mon Jul 9, 2012 6:59am EDT

* CBOT membership prices jump 22 percent in June

* Increase comes as traders fear end of grain floor

* Hot grain market attracts buyers

By Ann Saphir and Tom Polansek

CHICAGO, July 9 (Reuters) - A cadre of largely electronic traders are bidding up seats on the Chicago Board of Trade, even as trading floor veterans fear that new exchange rules threaten their ability to make a living in the famed pits.

Hedge funds and trading firms from as far away as Taiwan fueled the most active month of membership trading in more than a year last month, angling to get a seat on the CME Group's signature platform to profit from drought-driven volatility in grain prices or simply save money on fees.

The price for a full Board of Trade membership, which gives the right to buy or sell any contract offered at the exchange, rose 22 percent to its highest in three months, a trend fueled by the market's steady shift from its traditional open-outcry roots to a newer breed of computer-driven traders.

Of the 11 seats that were traded, nine were bought by trading firms or hedge funds, and nine were sold by individual traders or brokers, or by their estate, based on a Reuters analysis of weekly data published by the exchange. That pattern suggests to some observers that a years-long exodus of independent traders from the exchange has entered a new phase.

"People on the floor are cashing in," said Jim Goulding, a former CBOT floor trader and author of "From the Pits to the Pits," a story of his life on the floor. "The whole model is changing."

The jump in seat prices is surprising as the last three months have been particularly threatening for the pits.

The CBOT in May implemented nearly nonstop electronic grain trading and last month ended a century-old practice of settling end-of-day grain prices based on floor trading. New settlement rules incorporate electronic prices, which the exchange says better reflect a market that is largely electronically traded.

Denizens of the pits fear the new rules will stifle the shouts and shoves that have marked 160 years of open-outcry grain trading, and some floor traders have sued CME to stop it.

Historically, speculation that the end of the trading floor is near has hurt the price of exchange seats, which are used by floor traders to gain access to open-outcry pits.

"It does seem like an anomaly," said Pat Arbor, a former CBOT chairman, who leases a full seat to an electronic trading firm.

GRAIN SCRAMBLE

Arbor attributed the rise in seat prices to a severe Midwest drought that has boosted grain prices and volatility.

Because seats give traders discounts on fees -- CBOT charges nonmembers $1.75 per contract to trade corn futures electronically, compared with 14 cents for members -- memberships command a premium when volume rises.

"The grain markets are pretty hot," Arbor said. "I think people want access to the market to get better fees."

Membership prices topped $300,000 late last month as the estate of May Lou Cashman, the widow of a grain trader, sold two seats, one to Chicago-based trading firm Ajax Trading LLC, and the other to Capital Futures Corp, a Taipei-based futures brokerage and trading firm.

"Many times, you can see a run-up in seats from guys like me who want to trade a hot product," said Philip Coulolias, a principal at Ajax, a proprietary trading firm.

$20,000 JUMP IN A DAY

Among recent buyers of CBOT memberships are Graham Capital Management, an investment firm that trades electronically in grains, currency and bonds. Graham snapped up two memberships last month, paying $275,000 for one on June 7 and $20,000 more for the other a day later.

Other buyers included Quantres Asset Management, a Nassau-based quantitative trading firm that prides itself on combing terabytes of data; hedge fund Rigel Cove; and Chicago-based trading firm 3 Red Trading, according to weekly reports CME sends to its members. All either declined to comment or did not respond to requests for comment.

The increase in seat prices is also unexpected because it comes as CME is preparing to increase margin requirements for exchange members who are classified as speculators under new rules from the Commodity Futures Trading Commission.

Under new rules expected in August, exchange members - such as local traders - will no longer be allowed to establish speculative accounts at a lower margin rate for hedgers.

YELLOW BADGES

CBOT full memberships were once synonymous with open outcry trading.

Easily identified by yellow badges pinned to trading jackets, "fulls" used to mob the grain futures trading pits, which are off limits to holders of other, less expensive types of memberships.

Seat prices typically rose and fell with perceived opportunity on the trading floor, whether that meant high volumes or big price swings or both.

But once the exchange opened electronic trading during daytime hours, much of the futures business migrated from the floor to the computer screen. More old-timers sold their seats; more electronic traders bought them.

Membership prices reached a record of $750,000 in November 2007 a few months after CME bought its crosstown rival the Chicago Board of Trade. Prices fell sharply as the financial crisis hurt trading volume, reaching a low of $209,500 in June 2010.

Now the grains futures pits are largely empty. Even so, as the rise in seat prices shows, the yellow badge is far from worthless. Options, which unlike futures are still largely traded in the pits, are tempting even for the likes of Ajax, which executes most of its trades electronically.

"Options strategies are often just easier in the pit than on the screen," says Coulolias, the Ajax trader.

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