CME Group chief testifies in long-awaited grain settlement trial

CHICAGO Fri Nov 1, 2013 5:39pm EDT

CHICAGO Nov 1 (Reuters) - CME Group Inc Chief Executive Phupinder Gill on Friday denied that the exchange-operator changed its settlement rules to give electronic grain traders an advantage over veterans of the Chicago trading floor, who have sued the company, saying its new rules are killing their business.

Gill testified as the trial opened in a lawsuit filed by traders who work in the open-outcry pits on the Chicago Board of Trade's 140-year-old agricultural trading floor. They sued CME in June 2012 to halt new end-of-day settlement rules that factored in transactions executed electronically, where most of the volume takes place.

Prior to the change, CME had a century-old tradition of settling futures prices for crops like corn and soybeans based on transactions executed in the pits. CME, the largest U.S. futures market operator, owns the CBOT.

The settlement methods were changed "to reflect where the activity took place," in electronic markets, Gill said in response to a question by the plaintiffs' attorney on the first day of a trial over the rules in Chicago.

The U.S. Commodity Futures Trading Commission, which oversees CME and the CBOT, expressed concerns about the practice of basing end-of-day settlement prices solely on open-outcry activity, he told Cook County Circuit Court Judge Jean Prendergast Rooney.

"Market integrity was going to be at risk" if the rules were not changed, Gill said in reply to a question by the defense. He noted that the pit-based settlement procedures were not in violation of CFTC rules.

Open-outcry traders sued to reverse the revised rules and have argued CME should not have implemented the new methods without a vote of approval by a majority of certain holders of CBOT memberships.

The lawsuit represents the last stand for traders on the floor, who traditionally did much of their business at the close of trading and say the new procedures are making the pits irrelevant. Some believe CME wants to shut down the floor in favor of electronic trading because the pits are expensive to keep open.

A handful of traders attended the trial, two wearing the distinctive trading jackets worn in open-outcry pits.

The impact of the revised rules was "to move all of the volume that was sacred to the pit, the closing volume, to the machines," said George Sang, a lawyer for the traders.

During the three weeks before the new rules took effect in June 2012, open-outcry trading accounted for 53 percent of the volume during the close of trading in the CBOT corn market, Sang said. During the three weeks after the change, 10 percent of closing volume was executed in the pit, he said.

Anthony McKerr, a plaintiff in the case and a trader in CBOT's corn futures pit, testified that his income had dropped more than 80 percent because of the revised rules.

Before the change, floor traders had already seen business dwindle during the past seven years as a vast majority of trading has migrated to electronic platforms.

Lawyers for CME said it did not need members to vote on the settlement rules. And the new methods did not encourage customers to trade in electronic markets as opposed to the pits, said Al Hogan, a lawyer representing the exchange operator.

Gill, a colorful executive who cracked a joke about his age while on the witness stand, said CME had made a commitment to maintaining open-outcry trading because some volume still flow through the pits.

As CME lawyers thanked him for coming to court, he said, "My pleasure. Let's not do it again."

The trial is set to resume on Monday.

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