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CBOT Traders Ask Court to Block Settlement Rules

Traders work in the S&P 500 pit of the Chicago Board of Trade. Photographer: Tim Boyle/Bloomberg
Traders work in the S&P 500 pit of the Chicago Board of Trade. Photographer: Tim Boyle/Bloomberg

Nov. 2 (Bloomberg) -- A group of Chicago Board of Trade brokers and traders who practice the traditional method of completing trades with shouting and hand signals asked an Illinois judge to block new settlement rules they say are hurting their livelihoods.

The change, which took effect in June 2012, introduced algorithms blending electronic trade information with that from old-fashioned open pit outcry for end-of-day agricultural trade price settlements on the exchange owned by CME Group Inc.

About 20 opponents of the new system are asking state court Judge Jean Prendergast Rooney in Chicago to issue an order blocking the rule so it can be put to a vote by the exchange’s members.

The price settlement process determines who makes or loses money on the day’s trading. At a hearing yesterday, Richard M. Goldwasser, a lawyer for the opponents, asked CME Group Chief Executive Officer Phupinder Gill if that process was “kind of a big deal.”

“It is not ‘kind of,’ it is,” Gill replied.

The CME Group CEO was the second witness called at the hearing scheduled for three more days.

Gill told Rooney the pricing methodology change was adopted even after failing to garner approval from two separate board of director committees out of concerns for market integrity because the vast majority of trades was being made electronically.

Outcry Pit

The change in methodology “will, for all practical purposes, eliminate the open outcry pit-based system in which the plaintiffs and their businesses trade,” George Sang, another lawyer for the traders, said in a filing asking the court to block it. He also said his membership rights were being violated.

“What started as an emergency is no less of an emergency today if not more so,” Sang said yesterday in his opening statement.

One effect of the rule change, Sang said, was to shift closing trade volume away from the CBOT’s trading pits and onto electronic platforms, in contravention of the exhange’s 2005 promise to maintain open-outcry trading.

Besides the Board of Trade, defendants include its parent company, Chicago-based CME Group Inc., Chairman Terrence Duffy and Gill.

“Customers have made a choice and these plaintiffs don’t like that,” Albert Hogan, an attorney for the defendants, said yesterday in his opening statement.

Customer Preference

The migration of investors to electronic trading is voluntary and the rule change had nothing to with it, Hogan said. “Customers prefer the electronic venue,” he said.

The change was made to ensure settlement prices reflect “the full breadth” of market activity, the defendants said in a court filing. They denied the claim by the brokers and traders group that the rule change breached their contractual rights.

“CBOT, not its members, is empowered to make and amend its rules,” according to the filing.

Members only get a right to vote on those changes if they’re specifically enumerated in its certificate of incorporation, the defense attorneys said in a September 2012 court filing.

The organization has said it made the change to ensure the exchange was consistent with the federal Commodity Exchange Act and with Commodity Futures Trading Commission requirements.

Earlier Ruling

Last year, Lee Preston, the Illinois judge previously handling the case, denied the bulk of a defense request for judgment in its favor. Preston also rejected the traders’ breach of contract claims against Duffy and Gill and their breach of fiduciary duty claims against the the company and its officials.

The first witness to testify yesterday was Anthony McKerr, 51, of suburban Glenview, Illinois who purchased an associate membership on the exchange in 1988 and a full membership for $340,000 five years later.

McKerr, an open outcry trader in the CBOT corn pit who also trades electronically, said his father was a trader in soy beans and that his brother and sister also trade corn.

Comparing the first six months of 2012, before the rule change took effect, with the first six months of this year, McKerr testified his floor-trading volume is down more than 50 percent and his income has fallen 87 percent.

On cross-examination, defense attorney Jerrold Salzman asked McKerr if he was no longer making $500,000 a year based on price settlements computed during the last minute of floor trading under the old rule.

“I trade all day,” McKerr answered. “I make my money when the volume comes into the pit. I physically stand there all day long.”

The case is McKerr v. The Board of Trade of the City of Chicago, 12CH23185, Cook County, Illinois, Circuit Court, Chancery Division (Chicago).

To contact the reporter on this story: Andrew Harris in federal court in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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