CHICAGO CME Group won a key tax break from the state of Illinois on Tuesday as traders on its Chicago floor objected to a new exchange rule they say threatens the very jobs the tax break is designed to save.
Senators in the state capital of Springfield approved 44 to 9 a measure that cuts CME's and CBOE Holdings Inc's annual tax bills by a collective $85 million, a bid to keep the exchange operators from leaving the state and taking thousands of jobs with them.
CME and CBOE had threatened to relocate from Chicago after Illinois raised corporate and income taxes in January. The measure slashes CME's tax bill by about $77 million, and CBOE's by about $8 million, according to figures from Illinois Senator President John Cullerton's office.
The package also benefits and extends a $15 million tax break to retailer Sears Holdings Corp.
The House passed the measure on Monday, and Illinois Governor Pat Quinn praised the move and indicated he will sign it into law.
The total tax break package passed Tuesday, including a separate measure that gives tax credits for low-income families, will cost the cash-strapped state as much as $370 million annually.
Sears said the measure recognizes its value to the state, and CBOE said it allow exchanges to "retain Chicago's rightful status as a world financial center." CME declined to comment.
The vote comes a day after CME said it will start incorporating data from electronic trading to set grain and livestock closing prices by next spring, a move that could sharply limit the role of the trading pit where closing prices have always been set.
On Tuesday morning, knots of traders and brokers gathered near the pits to discuss the new rule, which they said their large customers oppose.
"This place used to be a hub of information," said Robert Wharton, a livestock broker, who said his customers did not know about the rule change and want to keep face-to-face trading.
"When you lose more jobs here the information doesn't get dispersed as fast or as correctly."
While the pits are typically quiet for much of the day, the final minutes of each trading session are marked by frenetic buying and selling because only pit-traded dealings are used to set the official end-of-day price.
Alan Young, a cattle trader and one of the key organizers of pit opposition to the new rule, sought to draw a contrast between the jobs Illinois stands to keep by giving CME a tax break and those he says it stands to lose by allowing CME to impose the new settlement rule.
"We want to save the pits, so they can save the jobs they promised in Springfield," Young said.
CME has a long history of adopting rules that tend to push trading to the computer screens, in large part because once contracts are traded electronically, volume historically rises.
The lion's share of trading at CME's Chicago Board of Trade, Chicago Mercantile Exchange and the New York Mercantile Exchange has moved from the face-to-face pits to the computer screen.
Cullerton, one of the bill's sponsors, told fellow lawmakers before Tuesday's vote that the measure was not a tax break for CME, but only corrects the tax code to account for the shift in CME trading to the computer screen.
Under current tax code, all trades transacted at CME's Chicago exchanges are counted as if they took place on the trading floor, even though most of those trades are conducted electronically, many of them out of state. Under the measure passed today, about 27 percent of trades will be taxed as Illinois revenue.
CME officials say the new settlement rules, which allow electronic prices to be counted in the final price-setting, also simply reflect the migration to electronic trading.
Pit traders for their part see the new rules as a threat and vowed to lobby the exchange to reverse course. Traders held a rare members' meeting at the close of trading Monday that drew more than a hundred, and say they plan another one for later this week.
"Basically it will be a pit killer," said Jim Clarkson, an analyst for A&A Trading. "My feeling is big traders, including funds with the big volume, want the business on screens. But I believe the more traders you have, the better markets you have. In the end, all electronic trade will be much more volatile with bigger price moves."
The CME Group's changes will apply to CBOT corn, soybeans, soyoil, soymeal, oats, wheat and rough rice futures as well as CME live cattle, feeder cattle and lean hog futures.
A CME spokesman did not immediately respond to a request for comment.
(With reporting by Karen Pierog; Editing by Jim Marshall and Andrea Evans)