In a statement last week CME Chief Financial Officer John Pietrowicz said the CME is in the process of creating new technology for electronic options trading. Good Luck. Lots of folks have tried this one and have not yet found the ability. Private firms involved in Net Flix options quotes and trading saw their option computers melt down during that first week of trading. Overload the options computer in our U.S. commodity markets and chaos erupts.
All of the hoopla this week succeeded in raising expectations that more open-outcry pits will eventually close, and as soon as possible, if you believe the power of the mega public trading/clearing exchange who is at the controls. To make their point the CME terminated 50 floor employees says the rumor mill, but executive interviews suggest they are for real in trying to save what they feel is 40 million in costs while the options floors are open. “If we’re able to electronify the options, we have an opportunity to have additional savings as the company is putting an intense focus on expenses,” said Pietrowicz..
At a private membership meeting with CME leaders last Friday afternoon little concern was voiced for the hundreds of traders and market makers and brokers who currently provide the trade with a transparent marketplace to say nothing about their livelihood. What has happened is spreads have tightened in the bid and ask on the screen and the private customer wants that fill right away thus the small options trade has transitioned to the screen. But the big boy trader out there has filled the void as he is able to trade size in puts and calls and strategies that he can’t get on the screen, and most importantly with limited slippage. Transitioning him to the screen is a huge issue, almost as big of an issue as the “role” trade that happens in a single month marketplace like we have in financials. This trade facilitates the thousands of hedge fund, CTA, and fund traders of all types who will have to re-write their rules in some way to accommodate a different marketplace,— or will they seek other venues?? A call -around trade can happen anywhere with London already heavily invested in that type of big-boy trade that limits it’s participants by the size you want or have to trade. If that happens, liquidity suffers for the small trader.
Options trading, which is often more complex than futures, offers buyers the chance to speculate on prices without the obligation to pick up the underlying asset. More importantly, each futures change in price of one month creates a fleet– potentially hundreds — of changes in options prices and values. That issue has humbled the biggest of computers up until now – good luck CME. If they are successful that 40 million dollars drops into their pockets minus the monies spent on and necessary to maintain the system. But there is more to this story.
Electronic trading has already skimmed away about half of the options pits’ market share to nearly 40 percent of total volume today from 85 percent in 2007, according to CME data. Some of this electronic trade has been created by the CME themselves in order to accelerate the stats in favor of the electronic option share. By creating trading units, proprietary that is, and making deals with large trading firms to rebate fees in the mega millions they have greased their own palms on a long term basis?? Why? – what is the big pie?
The pie is not – charging admission to visitors to the Chicago trading floor to see this bastion of free enterprise (but The new owners of the CBOT building may want to think quickly to keep this a financial destination). They could charge admission to see the computers – whoops, that is all probably up in the clouds somewhere so that’s not an idea. They could take everyone to Ceres café where that biggest of all Chicago bars used to be ( but they should change the name back to “the Sign of the Trader”.. They could charge admission and show them some statues or maybe they get smart and open an observation deck on the 41th floor promoting the Ceres statue and creating a new view of LaSalle street?
But no, all of the above ideas are not the big pie —-The pie is – creating a marketplace that is too big for potential competitors and to create ways to force market players to pay up if they want to play. The exchange operator generally captures a higher rate per trade from electronic transactions than those executed in open-outcry pits so it is easy to see where they are going there. And the exchange fees for quotes is an old idea coming back to life at the expense of many. But maybe, just maybe, this is chump change in the scheme of things? Great minds create Great opportunities???