Bloomberg News

CBOT Traders Lose Bid for Chance to Reverse Pricing Change

April 01, 2014

A group of Chicago Board of Trade members lost a bid for a court order pausing the exchange’s shift from determining final settlement prices based on trading floor shouting to a method incorporating electronic trades.

Trade settlement pricing is typically determined during the last minute of the trading day. The pricing dictates the value of futures contracts and determines which traders made money on a given day.

About 20 traders and brokers sued the exchange, owned by CME Group (CME:US) Inc., in June 2012 just before it adopted the new system, complaining it would cause a loss of pit trading jobs and violated their rights as exchange members.

Cook County Circuit Judge Jean Prendergast Rooney, who heard four days of evidence last November, yesterday rejected the members’ request for an order blocking the change so they could vote on it. The brokers and traders hadn’t proven they had a “clearly ascertainable”right to vote on the question, the judge said.

A copy of that decision was provided by Al Hogan, a CME Group lawyer, and wasn’t immediately available from court records. Hogan declined to immediately comment on the decision.

Those testifying at the hearing in November included CME Group Chairman Terrence Duffy and Chief Executive Officer Phupinder Gill.

Asked by plaintiffs’ lawyer Richard Goldwasser if the trade settlement pricing process was “kind of a big deal,” Gill replied, “it is not ‘kind of,’ it is.”

Market Integrity

Gill said then that the pricing methodology was changed out of concern for market integrity because the vast majority of trading volume was being conducted electronically.

Prendergast Rooney also heard testimony from several members including lead plaintiff Anthony McKerr, who told her his father, brother and sister had all traded grain futures.

McKerr told the court his corn pit volume dropped by 50 percent in the first half of 2013 compared with the same period the previous year, before the pricing change took effect. He said he trades electronically, too.

“We should have at least had a vote,” Ralph Dynek, a trader, said in his testimony.

The grain futures traders argued their memberships entitled them to a vote on the pricing shift, which they called the “death knell of the open outcry markets,” the judge said.

CME’s lawyers contended the traders and brokers’ “Class B” memberships didn’t include such a right. CME acquired the exchange in 2007.

Key Question

“The issue before the court,” Prendergast Rooney said, “is not whether the plaintiffs’ businesses have suffered.” The judge said she found the traders’ testimony on that point credible. “Rather the issue is whether the plaintiffs showed that the defendants promised a member vote on the rule change and whether they breached their promises.”

She denied their request, saying they hadn’t clearly established that right. She scheduled a status conference for April 4.

Goldwasser and his co-counsel, George Sang, didn’t immediately respond after regular business hours yesterday to an e-mail seeking comment on the ruling. Laurie Bischel, a CME spokeswoman, declined to comment on it.

The case is McKerr v. Board of Trade of the City of Chicago, 12-CH-23185, 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 editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Andrea Tan


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