In an effort to bolster flagging membership prices at the Chicago Board of Trade, exchange leaders have endorsed a proposal that would impose additional transaction fees on floor traders and brokers who lease seats instead of purchasing them.
Approved by the CBOT board of governors Monday, the proposal would require brokers and traders who lease their seats from absentee members to pay graduated fees for each futures contract they buy and sell during a five-year period. In theory, traders and brokers can lease seats for no longer than five years.
Exchange leaders concede the measure is designed to push broker and trader lessees, called ”delegates,” into purchasing memberships as part of an overall drive to prop up CBOT seat prices.
But several delegates Wednesday blasted the graduated-fee proposal, calling it a transaction tax no different from the one proposed recently by the Bush administration.
”The board of governors is looking for ways to make the delegates, who are a minority, appear as the bad apples,” said one delegate who asked not to be identified.
”Instead of boosting seat prices by developing new products or hyping volume through superior marketing efforts, the board is opting for a quick and dirty mechanism that runs counter to the very symbolism of this place-a citadel of free and unfettered markets,” he said.
Currently, delegate traders and brokers have no say in exchange affairs and are unable to vote in CBOT elections or important referendums. But they pay the same transaction fee members do, 2 cents for each purchase and sale of a futures contract, while leasing seats for around $3,500 a month.
Under the board proposal, however, delegates who trade for their own account would pay an additional 2 cents for each trade during the first year of their delegate status; 5 cents during the second year; and for the remaining three years, 10 cents for each trade.
Delegate brokers would be required to pay an additional 3 cents for each trade during the first year. For the four subsequent delegate years, the brokerage fee would rise to 10 cents a trade.
The proposal will be presented to a membership vote in the form of an advisory referendum soon. The CBOT board has indicated it will decide whether to enact the plan based on the outcome of the vote.
CBOT President Thomas R. Donovan told members in February that sagging seat prices result, in part, from the growing number of floor traders and brokers who lease seats. Donovan decried their presence, roughly 40 percent of the CBOT`s approximtely 3,000 members, asserting they have little commitment to the exchange`s overall welfare.
Adopted some years ago, the delegate program was designed as a port of entry for young, undercapitalized and inexperienced traders unable to purchase a seat immediately. Under the program, the newcomer was expected to lease a seat for no longer than five years, giving him time to decide whether the trading game was for him and to acquire the necessary funds to purchase a seat.
In recent years, particularly as CBOT seat prices have fallen more than $150,000 from their historical highs of $550,000, growing numbers of traders and brokers have opted to stay in the delegate program. Moreover, some members complain, they have been able to avoid the five-year leasing cap because there is little enforcement of that provision.
”When President Bush announced several months ago that he was going to impose a 12-cent transaction fee on each futures trade conducted in this country, (the) exchange railed about how such a tax would hurt liquidity, chase business to foreign shores,” said another delegate who has traded grain futures for the last three years.
”Now, these same individuals are telling everyone that their transaction fee, which really is a tax, is the proper way to go,” he said.
