Banking & Finance

What CME Will Save, and What Risks It Takes, Closing Trading Floors

Floor trading for the financial exchanges has been a dying business for some time. Whether this was the CME, the CBOT, the NYSE or others, the reality is that the electronic age has been killing the exchanges’ floor trading volumes. The CME Group Inc. (NASDAQ: CME) decision to close a large portion of its trading floor and open outcry operations in New York and Chicago may not come as a surprise to many investors.

24/7 Wall St. has two key questions here. The first is what CME will save in dollars by closing trading the floors. The second question, and perhaps the more important one, is what new risks this poses for investors and exchanges.

CME said that open outcry futures trading volume is now only 1% of its total futures volume. CME’s closing date for most of its futures trading pits in Chicago and New York is set to be on July 2, 2015. A minimal amount of floor trading will still occur. The CME statement said:

The floor-based S&P 500 futures market, which continues to provide an important venue for trading the underlying futures contract for the open outcry S&P 500 options on futures contract, will remain open on CME Group’s Chicago trading floor. … Options on futures contracts, which continue to trade actively on both the floor and the screen, will remain open on both trading floors except for the DJIA ($10) and NASDAQ-100 open outcry equity index options markets which are designed to deliver into floor-based futures contracts.

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CME has also said that it plans to assist its floor traders with the transition by attempting to make booth space available to those who want to trade electronically after the trading pits close.

So, What Will the CME Actually Save in Operating Costs?

CME’s net income was $976.8 million in 2013, with income from operations of $1.047 billion.

Open outcry volumes fell to less than 9% of total volume by 2007 and less than 2% by 2011, according to Reuters. So open outcry volume has been cut in half in the past four years or so. The 2013 annual report showed that the last big drop in open outcry volumes was in the 2011 to 2012 period, when volume tanked by 25% to 1,045,000 contracts per day.

Even in 2013, CME had said it considered pit (open outcry) trading services as a profitable within the business. The problem is that CME total annual operating margin had been in decline, according to the 2013 annual report. That operating margin fell to 56% in 2013, down from 58% in 2012 and from 62% in 2011, due to operating expenses rising more than revenues.

The 2013 annual report also showed occupancy and building operations was up 2% to $78.3 million.

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So, on what CME will save here by the move? A CME spokesperson told 24/7 Wall St. over the phone that the closure of the futures pits announced this week will save roughly $10 million in annual operating expenses. This was said to represent roughly a quarter of all operating costs tied to floor operations.