LEO MELAMED DEFENDS CME EURODOLLAR RULES
- Leo Melamed, former chairman of the Chicago Mercantile Exchange, said on Tuesday that large, privately negotiated trades that sparked a protest in CME Group's Eurodollar options are critical to the market.
Melamed, who founded financial futures, told reporters at a derivatives conference that the large trades could not effectively be completed in open outcry trading. Yet, the man who led the creation of Eurodollars at CME in 1981 was unsure whether the delay in reporting the trades publicly is too long.
Independent traders, known as locals, on Friday stood outside the options on Eurodollar futures pit in protest of "block trades," hurting volume in the market.
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, while the large majority of trading in options contracts takes place face to face on the CME's trading floor.
Block trades are large, privately negotiated transactions that are struck away from the broader market and cleared by the exchange. They must exceed exchange-set size limits and are reported publicly five minutes after completion during regular trading hours.
The delay in reporting puts floor traders at a disadvantage, according to locals, who have said they were not able to participate in recent block trades, including one on Thursday that may have been the largest in history.
Locals have said the transactions can be completed more efficiently and equitably in the open outcry pit, and customers can get better pricing there.
Melamed, CME chairman emeritus, said CME must allow large trades to be executed away from the broader market because they can not be "done just like that in the pit." The market will be "carried away" from the large trades if they are executed on the floor, instead of negotiated privately, he said.
Regarding the delay in reporting, "it's anybody's guess whether five minutes is too much," Melamed said.
David Stein, a local trader and leader of the Eurodollar protest, said large transactions are executed in the pit every day. Five minutes is "an eternity" for floor traders who are unaware that large block trades have been executed, affecting the market, he said.
CME executives met on Monday with Eurodollar options traders, including Stein, and were uninterested in changing the rules regarding block trades.
Floor traders do not know what their next move will be, Stein said.
ICE PLAN FOR GRAIN FUTURES 'A JOKE'
In other news, Melamed said IntercontinentalExchange's plan to start trading U.S. grain futures, in direct competition to Chicago Board of Trade contracts, was "a joke" because CBOT is well established in agricultural markets. CME owns the CBOT.
ICE - which is slated to launch futures for corn, wheat, soybeans, soymeal and soyoil in May - declined to comment.
Melamed also said Phupinder Gill, CME's president and next chief executive, will present plans to CME's board of directors this week. He said he will continue to lead international efforts at Gill's request and reiterated CME statements that Gill will not shift the direction of the company.
