Decrying divisiveness at the Chicago Mercantile Exchange, and responding to criticism, a group representing powerful broker associations has been formed to defend its turf, set some self-regulatory standards and reach understanding with opponents.
It won’t be an easy sell.
Broker associations, which, like independent brokers, fill futures orders from institutional and retail customers, have grown from informal groups that shared clerks to highly organized businesses.
Over the years, the groups have been attacked by independent traders for alleged unfair-trading practices in the pits and too much influence on exchange committees and the board of directors. The accusations range from control of panels that settle trading disputes in the pits, to giving favored traders best chance at customer orders, to threats of loss of business.
“There is a tension on the floor, but it is mostly driven by quiet markets,” said Thomas Kloet, a Merc director and chief operating officer of Credit Agricole Futures Inc. The firm is a futures commission merchant, which directs orders of large clients to brokers on the exchange floor.
“Our business is cyclical,” said broker James Kaulentis. “If everybody was making money, there would be fewer problems.”
Along with brokers and commission merchants, the third major member group is the so-called locals, who trade for their own accounts. Some of these have complained about broker association clout.
So do some futures industry heavyweights. Leslie Rosenthal, a former chairman of the Chicago Board of Trade and managing partner of the Rosenthal Collins Group, said he was frozen out when he attempted to put a broker association on the Merc floor three or four years ago.
“We had four brokers who could get no business from existing groups and who were at times physically intimidated. The locals toed the mark and didn’t want to offend those groups,” Rosenthal said. “We even had customers who wouldn’t trade with us because they felt we wouldn’t last and then they would be at the mercy of the other groups.”
Rosenthal said he believes that the large Merc broker associations are “uncompetitive and monopolistic.”
“We felt we had been standing like wooden Indians for years, letting our critics attack us, while we never had a forum by which we could get our message out,” said Kaulentis, managing partner of International Futures & Options Associates, which generally is regarded as the largest broker association at the Merc.
“We realize it is an unpopular business, but it represents an evolution, not something that we personally orchestrated and choreographed,” he said. Still, he said he had attempted to reach out to some of the critics to try to reach a common ground, but so far, “they won’t even have lunch with me.”
The federal futures regulator, the Commodity Futures Trading Commission, has been looking at broker associations. A spokesman called the inquiry a “continuing horizontal study, not an investigation,” of groups on all exchanges.
Seven of the Merc broker groups–representing 148 brokers, 89 exchange seats, 78 leased seats and 350 clerks–have formed the National Alliance of Futures and Options Brokers.
Under a broad rule definition, the Merc has 207 broker associations registered. Of those, 99 are the small, affiliated groups that share a clerk, but not brokerage business. There are 108 of the “for-profit” associations in which brokers share profits, losses, risk, and error payouts.
On the other side, the Merc listed 1,063 members who traded for their own account in July.
“The exchange has imposed rules on broker groups–that we’ve accepted–but that we think are onerous,” said John Oberman, co-principal of Chicago Futures Group, a large association. “We have greater regulation put upon us than the large clearing houses.”
For example, directors this month voted to require that intragroup trading in the most active Merc pit, Eurodollar contracts, be cut to 15 percent from 25 percent.
“I took great exception to this change because it inhibits us from serving our customers in the best possible way,” said John Newhouse, president of Eurospread Associates and a Merc director. “They didn’t give a lot of weight to the fact that the (broker group) community in the Eurodollar pit was running at 5 percent when it really could have been 25 percent.”
