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Chicago Traders Stage Walkout In CME's Eurodollar Options

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04/13/2012 | 09:46pm CEST

--Independent traders boycott trading at CME's Eurodollar options pit for about an hour

--Traders say a large "block" trade of CME Eurodollar futures Thursday was unfair; CME says trade was legitimate

--Walkout threatened to deplete volumes in the market

(Adds comment from trader, background on CME, Eurodollar options market.)

   By Owen Fletcher and Jacob Bunge 

CHICAGO (DOw Jones)--Independent traders staged a walkout in one of CME Group Inc.'s (>> CME Group Inc.) 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

Stocks mentioned in the article : CME Group Inc.
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Financials ($)
Sales 2016 3 549 M
EBIT 2016 2 279 M
Net income 2016 1 455 M
Debt 2016 -
Yield 2016 4,58%
P/E ratio 2016 24,80
P/E ratio 2017 22,10
Capi. / Sales 2016 9,89x
Capi. / Sales 2017 9,35x
Capitalization 35 085 M
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Average target price 110 $
Spread / Average Target 6,7%
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Phupinder S. Gill Chief Executive Officer & Director
Terrence A. Duffy Executive Chairman & President
Julie Holzrichter Chief Operating Officer
John W. Pietrowicz Chief Financial Officer
Kevin D. Kometer Chief Information Officer & Senior MD
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