2nd UPDATE: Chicago Traders Stage Walkout In CME's Eurodollar Options
13 Aprile 2012 - 10:01PM
Dow Jones News
CHICAGO (DOw Jones)--Independent traders staged a walkout in one
of CME Group Inc.'s (CME) busiest interest-rate derivatives pits
Friday, protesting a large, privately negotiated trade a day
earlier that they claimed was unfair.
The action by several dozen floor traders, which lasted about an
hour, made prices harder to come by for some contracts used by
banks and hedge funds to protect against shifts in key interest
rates, and threatened to deplete volumes in the market.
Floor traders, also known as locals, acted out in protest of a
so-called "block" trade of options on CME's Eurodollar futures.
Such block trades are privately negotiated transactions agreed off
the trading floor but cleared by the exchange and reported on the
exchange group's website. Block trades happen often, but the size
of the trade carried out Thursday--numbering hundreds of thousands
of contracts, according to traders--angered locals in the pit who
complained that such transactions unfairly bypass the floor and
have been a problem for years.
Thursday's outsized trade "was sort of the straw that broke the
camel's back" for the protesters, said David Stein, an independent
trader who was standing outside the pit Friday and who helped
organize the protest.
Stein said allowing privately negotiated block trades was
"anti-competitive" and "un-American." Other traders said the block
trade drew more attention than some others because it was fairly
large, and the transaction price was relatively high above pit
levels.
CME spokesman Michael Shore said the trade was legitimate and
managed by long-standing rules at the exchanges. The CME declined
to provide specific details about the trade.
Eurodollar futures and options contracts are linked to
anticipated changes in the London interbank offered rate, which
banks charge one another to borrow U.S. dollars. The Libor is a
globally followed gauge for credit conditions and factors into
mortgages and other loans.
Market makers in trading pits like that devoted to Eurodollar
options contracts are intermediaries that enable banks and hedge
funds to smoothly transact business. Such traders stand ready to
buy and sell contracts, ensuring someone takes the other side of a
trade at any given time.
Floor traders remain an important component of the Eurodollar
options market, where open-outcry trading at CME's Chicago-based
trading floor has been estimated to account for about 90% of
business in the contracts.
Locals in the Eurodollar options pit were upset Friday because
they weren't able to participate in Thursday's big trade, brokers
said, despite the floor ably handling a similarly sized transaction
earlier this week, traders said.
One floor broker said roughly 95% of the Eurodollar options
traders joined in the walkout Friday, and that the event had
significantly reduced trading volume. It was difficult to discern
how much the walkout reduced activity. Market participants said
trading in the options was slow in general Friday.
"It was hard to get a quote on the screens for Eurodollar
options this morning while the 'strike' was in effect," said Chuck
Retzky, director of futures sales at Mizuho Securities USA.
Stein said the trade in question was done by phone. When that
happens, he said, information about the trade isn't immediately
displayed on the exchange wall's screen, and before it appears the
people involved in the trade can keep making other trades to
profit, knowing the information could affect prices.
Stein said the protesters want the CME to ask that a party in a
block trade first make the information public by doing an
"all-or-none" offer in the trading pit. This would allow customers
to get a better price on what they are buying in the block trade
and also would prevent what could be seen as insider trading, he
said. The protesters also want the exchange to suspend block
trading until a new rule is put in place.
Representatives of the protesters and the exchange will meet
Monday to discuss the traders' concerns, Stein said.
CME's Shore said the trade "was a legitimate, well-managed
trade, which was executed within one tick and in one trade."
The options trade in question involved more than 200,000 put
options on June 2014 Eurodollar futures, with about half set to
expire Friday and the others in June of this year. The transactions
project short-term rates to rise, which is contrary to market
sentiment.
--Howard Packowitz, Ian Berry and Stephen Bernard contributed to
this article.
-By Owen Fletcher, Dow Jones Newswires; (312) 750-4120;
owen.fletcher@dowjones.com
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