Judge rules grain traders can proceed with CME price-settlement lawsuit

Dec 1, 2012

A Cook County Circuit Court judge in Chicago ruled on Monday, Nov. 26, that a group of 24 Chicago Board of Trade (CBOT) grain pit traders and brokers can proceed with a federal lawsuit against the CME Group Inc. for electronic trading rules they fear will eliminate their jobs.

About 2,500 traders, clerks and runners work the CBOT and Chicago Mercantile Exchange floors, thousands less than 20 years ago. CBOT merged with the Merc in 2007 to form CME Group after traders ceded day-to-day control when the Merc demutualized in 2000.

Judge Lee Preston denied a motion by CME Group—owner of CBOT and the largest operator of U.S. futures exchanges—to dismiss the lawsuit that seeks to reverse CME’s new end-of-day price settlement rules that factor in electronic transactions, where about 85 percent of volume occurs.

The traders, who work in the open outcry pits on CBOT’s 160-year-old agricultural trading floor, filed the lawsuit in June to block factoring in those electronic transactions, which they say breach contracts. CME had planned to impose the closing price change on cattle and lean hog traders, too, but they won a reprieve.

Attorneys for the grain traders will appear before Preston on Dec. 4 to discuss access to CME documents for their case. CME submitted the new procedures to the Commodities Futures Trading Commission (CFTC), which it claims demanded the changes.

CME for decades settled futures prices for commodities like wheat, corn and soybeans based on transactions executed only in the pits.

Traders have done much of their business at the close of trading, but contend the new electronic trading renders the pits virtually  meaningless. They fear CME wants to completely shut down the pits because of operating costs.

Floor traders have seen a dramatic decrease in recent agricultural futures trading. During the past six years, most trading has moved to electronic venues. They contend the new settlement rules were not approved by a majority of CBOT members. Their lawsuit asserts the changes were “simply adopted by arbitrary fiat” by CME Executive Chairman Terrence Duffy and CEO Phupinder Gill.

CME decided last year to sell the building where the agricultural pits are located. Duffy, a defendant in the traders’ suit, has been reluctant to say when the pits will disappear. He once traded hog futures there.

CME fought grain traders in May after proposing to extend its electronic trading from 17 to 21 hours to compete with Atlanta-based Intercontinental Exchange Inc., which this year entered the corn futures market with a 22-hour trading day. The traders said the added hours didn’t give them time to review federal farm reports outside trading hours and their customers feared that would increase price volatility and costs.

CME Group says it will press on with the planned change to the way it calculates closing prices for its benchmark grain markets despite the legal challenge filed on Friday, Nov. 24, by the floor traders, saying it accurately captures contract values.

CBOT’s agricultural pits date back to 1848 when they were started to help merchants buy commodities at set prices and protect farmers against crop price swings. In August, CME announced plans to launch a London-based exchange, its first outside the U.S., hoping to compete with NYSE Euronext and Deutsche Boerse AG. The company expects the European bourse to be set up by the second quarter of 2013. Non-U.S. revenue accounted for up to 30 percent of CME’s earnings.

In another matter, CME Group sued CFTC to challenge how trade price and volume information is routed to new databases under the Dodd-Frank Act. The commission also sought comment on CME’s proposed policy of having data for trades guaranteed by its clearinghouse sent to its own so-called swap-data repository. — Mark Mendiola, WLJ Correspondent