* 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 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
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
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
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
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.
CBOT full memberships were once synonymous with open outcry
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
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
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.