April 13, 2012 / 8:45 PM / 7 years ago

UPDATE 1-Traders boycott CME Eurodollar options

* Traders stay out of options on Eurodollar futures pit

* Boycott hurts volume in market

* Protest stems from large “block trades”

* CME says “block trades” are important tool

By Tom Polansek and Ann Saphir

CHICAGO, April 13 (Reuters) - Independent traders boycotted pit trading of CME Group’s options on Eurodollar futures on Friday in protest against large, privately negotiated trades that they say put them at a disadvantage.

The move shrank volume in the market until the floor traders ended their action in the afternoon.

Traders use Eurodollar contracts to bet on or hedge against moves in interest rates as far as 10 years in the future.

Among CME’s most active products, Eurodollar futures and options are traded largely by big Wall Street banks and hedge funds. Trading in futures takes place almost entirely electronically, but the large majority of trading in options contracts still takes place face to face on CME’s trading floor.

David Stein, an independent trader, said the floor protest stemmed from a string of recent “block trades.”

Block trades are large, privately negotiated transactions that are struck away from the broader market by phone or otherwise and cleared by the exchange. They must exceed exchange-set size limits and reported publicly minutes after completion.

The delay in reporting puts traders at a disadvantage, Stein said. He estimated 90 percent of trading in the market occurs on the floor.

“We’re tired of being taken advantage of,” he said about independent traders. “If we’re not here, there is no market.”

CME allows block trades, saying they provide the “convenience of privately negotiating a trade with a selected eligible counterparty” and the “ability to execute a large transaction at a fair and reasonable single price.”

“Block trading has been in practice for decades and is regulated by the exchange” and the U.S. Commodity Futures Trading Commission, CME spokesman Michael Shore said. “It is an important tool to allow customers to meet their needs while ensuring efficient markets.”

However, floor traders complain they were not able to participate recent large block trades. They say the transactions can be completed more efficiently and equitably in the open outcry pit, and customers can get better pricing there.

Block trades are allowed under CME rules, but “just because it’s legal doesn’t mean it’s right,” Stein said, adding that exchange officials “need to protect customers everywhere.”

Traders said they were slated to meet with CME officials on Monday about their concerns.


The protest came a day after DRW Holdings, a Chicago-based trading firm, executed what DRW founder Don Wilson said was probably the largest-ever block trade in Eurodollar options, totaling 215,000 contracts.

Each Eurodollar contract is tied to the interest on a three-month, $1 million deposit, meaning the block represented a notional value of $215 billion.

Using CME’s block trading facility - which bypasses the exchange’s open-outcry market — allowed DRW to get the gigantic trade done at a set price without jolting prices in the market in the process. CME allows such block trades for just that reason.

Wilson, who spent 16 years trading Eurodollar options in CME’s pit, said he was sympathetic to Friday’s protest.

But he suggested the traders might more rightly be upset about another, much smaller block trade completed on Thursday. That trade, Wilson said, was structured to benefit the customer’s broker in a scheme called “internalization” that comes at the detriment of the broader market.

Such internalization is not a good use of CME’s block trading rules, he said.

Wilson said “it’s hard to strike a balance” between allowing large traders the option of buying and selling huge lots in a way that doesn’t create disorder in the market, either by driving prices sharply up or down, and preventing banks from internalizing trades.

“CME has done a pretty good job” of striking that balance, Wilson said.

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