CME FLOOR TRADERS PROTEST BLOCK TRADES
- By Hal Weitzman
Independent futures traders at one of the CME Group's most high-profile trading pits have walked off the job in a highly unusual protest against"block trades", large, privately negotiated deals struck off the floor and reported to the markets after a delay.
The trade in question was a deal on Thursday for 215,000 Eurodollar options contracts, much larger than the typical trading size of about 500 contracts. During regular trading hours, CME Group, the biggest US futures exchange, gives parties to block trades five minutes from the time of the deal to report them to the wider market. Outside regular hours, the permitted delay is 15 minutes.
Independent floor traders, who trade with their own money and are known as "locals", say the 13-year-old system denies them the opportunity to participate in such transactions by offering better prices.
Although trading in most CME contracts is largely electronic, the Eurodollar options pit in Chicago has one of the highest proportions of floor-based trading, with more than 90 per cent of transactions taking place in the pit. Eurodollar futures are a financial instrument that captures the interest rate on dollar deposits held outside the US.
Most of the locals in the Eurodollar options pit participated in the walkout on Friday, leaving the pit at about 8am. Although many had returned within a few hours, the stoppage was rare.
"This is the first time I've ever heard of something like this happening at the CME," said Jeff Carter, a veteran CME local.
CME said the block trade had been "a legitimate, well-managed trade".
David Stein, a leader of the protest, said the locals were angry at the lack of competition and transparency in block trading. He told CNBC that such trades should be displayed to the entire market to offer quotes.
However, one of the parties to the block trade that sparked the protest said customers who make big transactions should not be forced to display them to the market. Don Wilson, chief executive of DRW Trading, a Chicago firm that is the biggest block trader in Eurodollar options, told the FT he had fought in the past to reduce the reporting delay, but said a delay was necessary.
"If someone wants to move a big trade, they want to be able to do it and not necessarily let everyone else know about it right away," said Mr Wilson. He said placing large orders openly would allow independent traders to profit by trading ahead of them. "If you do the trade in the pit and everyone sees it, everyone will front-run it."
