With the advent of electronic trading platforms, the door of opportunity was swung wide open for traders of nearly all types and sizes to participate in the futures and options markets. In the not too distant past, this was a trading arena that was only available to well-funded and, arguably, sophisticated speculators.
The CME Group (Chicago Mercantile Exchange) has played a big part in bringing these products to the masses through relentless strides in technology. Their efforts have paid off; exchange trading volume has been consistently higher. For example, the November 2013 volume for Eurodollar futures were up 53% relative to the previous year to an average of two million contracts per day, while Treasury futures volume rose 16% to three million contracts per day. Some products, however, experienced declines such as stock index futures whose volume fell last month by about 18% relative to the previous year.
Nonetheless, there was still an average of well over two million contracts in this complex traded per day. The CME confirmed its success by recently announcing a 45 cent per share dividend to its shareholders.
However, the same entity that worked so hard to bring retail traders into the fold could be taking action that will push many of them out of the futures and options markets and into alternatives (FOREX, ETFs, Eurex products, etc). The CME Group recently proposed several fee increases that will impact traders and brokerage firms. Together, the unintended consequences could leave an industry already bruised by economic calamity and the collapse of two major brokerage firms, in dire straits.
TRANSACTION FEE INCREASES, EFFECTIVE JANUARY 2014
For each trade executed in any of the CME products (most U.S. futures and options contracts), the CME receives a transaction fee which is charged above and beyond brokerage commission. The fee is deducted from the trading accounts of clients, and then forwarded by the brokerage firm directly to the exchange. Even if a broker is charging you an “all inclusive rate,” the exchange fees are paid; they are simply built in.
The amount of the fee depends on the market, but it typically ranges between about $1.00 and $2.60. The proposed transaction fee increase appears to be on average between 5 and 10 cents per side and will kick in on January 1, 2014. Simply put, a trader will be paying at least a dime, maybe twice as much, more for every round turn (in and out) transaction.
While this increase in fee might get in the way of high volume scalpers, we doubt such a small change will have a profound impact on the retail trading public. Nonetheless, it is difficult to fathom that it is necessary for the CME, a firm that has enjoyed year after year of volume increases, to raise fees in any capacity…even if the retail public might not “feel it.”
The said transaction fee increase is annoying but it likely isn’t a deal breaker. The data fee increase, on the other hand, is another story; let’s take a look at the details.
Data Fee Increases, beginning March 2014 for new users and January 2015 for existing
*Please note, these fees do not apply to traders that place their orders via a full-service broker or trade desk. They only apply to those that wish to have electronic platform access to price data.
I think that most traders and industry participants can live with the transaction fee increases previously discussed; however the ultimate effect of the planned data fee increase is downright chilling. The CME is proposing that it charge electronic data fees for access to quotes on various platforms. This is a service that traders have been enjoying for multiple years without incurring monthly subscription costs.
Prior to this fee proposal, industry insiders considered the CME’s transaction fee charges to be reasonable in exchange for the data, and it was assumed the CME felt the same way. After all, the easier it is for clients to get efficient pricing data, the more likely they are to trade. This directly translates into higher trading volume and, thus, more exchange fees collected by the CME (remember, the CME collects about $2.00 per round turn executed by each and every retail trader). We’ve recently learned that the CME is not content with the current arrangement and is proposing a substantial change in policy.
Most retail traders will be facing a $3 to $15 surcharge per platform for access to live data distributed by the CME Group. Those opting for the $3, would simply see the last price and current bid/ask quotes; those willing to pay $15 will have access to the order book, meaning it is possible to see the limit orders of other traders at nearby prices. This type of data is readily available for free in the DOM (Depth of Market) window of most trading platforms. Traders using multiple platforms will be expected to pay the fee for each platform used.
Again, these costs are likely not going to trigger an industry collapse. They are simply an annoying burden. But here is where things start to get noticeably unreasonable: traders categorized as “Professionals” are expected to pay a data fee of $85 per CME Group division (COMEX, CME, CBOT, NYMEX), per front end trading platform. For many of the so-called “professionals” it would not be out of the question for quote fees to climb into the multiple thousands of dollars per month!
What might be surprising to many of you is who is categorized as a “professional.” Under the CME’s data licensing policy, Commodity Trading Advisors, Commodity Pool Operators, and brokers are all somewhat obvious candidates, but unexpectedly the CME’s proposal identifies any account trading under a corporation or LLC as a “professional,” and, therefore, subject to the aforementioned data fees.
As a broker, I can attest that many individual traders form “mom and pop” business entities to trade futures and options. In the majority of instances, these corporate accounts are a husband and wife, a small farmer, or some other arrangement in which the sole beneficiary and decision maker is a small individual trader, who simply cannot afford the additional costs the CME is putting forth.
Exacerbating the issue is that many of these small traders and farmers have spent the last two years spreading their trading accounts among various brokerage houses in an effort to diversify their risk against the remote, yet real, possibility of a repeat of MG Global or PFG’s demise.
INDIRECT IMPACT OF DATE FEES ON RETAIL TRADERS
Even if the excessive “professional” data fees don’t impact you directly, they will eventually have an indirect effect going forward. I predict that if the fee policy is implemented in its current form, the industry will immediately lose a substantial number of brokers. While it is impossible to predict just how many, I suspect it could be as many as 30 to 40%.
Contrary to the assumptions of most, futures and options brokers are competing in a highly competitive field. Although there are handfuls that make enviable livings, there are many more that are simply scraping by to feed their families. The new fees could easily force them into career changes.
As a result, there will be less brokerage employees soliciting new accounts, which stands to work against market liquidity and cost efficiency in the industry. After all, if there are less traders (“professional” and “non-professional”) carrying the fixed cost burdens, commissions and other brokerage charges are most likely going to go up on an individual basis for all market participants.
If our assumption is true and the fee increase leads to fewer brokers; the impact to the industry will not stop at the diminished ability to open new trading accounts. The trading accounts that are opened are likely to be less successful; consequently, they will trade lower volume over a shorter time frame. This is because brokerage firms of all service levels (deep discount or full-service) will be less efficient at providing quality client services that are imperative to help clients survive the treacherous world of leveraged speculation.
IN CONCLUSION
The proposed fee increases levied by the CME will impact traders of all types, sizes, and skill levels. It is important that you voice your opinion to the appropriate parties now, to help mitigate the unintended consequences these changes will have on the industry going forward.
Please let the CME Group know how you feel. Send an email to: marketdata@cmegroup.com and info@cmegroup.com
Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. Her books, “A Trader’s First Book on Commodities,” “Currency Trading in the FOREX and Futures Markets,” and “Commodity Options,” were published by FT Press.
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