How To Make Money Without Trading

People always talk about making money by buying and selling stock, or buying and selling futures. There are other ways to make money in the trading business and I am attempting it today.

Some exchanges still have legacy seats left over from when they were member run organizations. CME Group bought the CBOT and NYMEX, yet they still have the legacy seats.  You still need the seat to get the lowest fees, and you need seats to clear the clearinghouse.

Seats are intangible assets that are traded, but they are versatile.  You can use  the seat to trade your own account.  You can buy the seat, and put it up for clearing with a clearing firm.  The firm pays you to do that.  The other thing you can do is lease the seat out to someone else that wants to trade.

There are three seats at the CME, B-1, B-2, B-3.  The B-1 is the most expensive. It was trading at close to $800,000 a couple of weeks ago, but traded today at $560,000!  The differences in the seats have to do with voting rights on “core” issues, and you get to trade different products at different prices.  For example, if you traded cattle, you’d only want a CME seat.

I bought an B-2 (IMM) seat today for $300,000.  A firm, Triland, was blowing out seats.  They puked out (sold) every single seat they owned at every single exchange, and withdrew as a clearing member of CME Group.

My guess is they were upside down on a lot of trades.

Last year at this time, the IMM seat was trading around $260,000.  Between then and now, it had rallied to as high as $470,000.  With increased financial regulation, and increased emphasis on clearing, the seat could be really valuable.

But, the reason I bought it was it was a good rate of return.  I am going to make 5% per year on my money.  At the end of the time I will have accumulated $488,670.  That’s a 62.89% return over a ten year period, and you still have the asset.  Of course, there is risk.  The seat could go down in value, and the lease payments fluctuate.  In my career, I have seen seats at all kinds of wacky prices.  But mostly the lease is from 1000-3000/mo and the seat value is somewhere between $250,000-$500,000.  There are only 824 of them.

If you trade futures at all, you should step up and buy a seat.  IOM seats are $100,000.  Suppose again you are trading emini S+P futures ($ES_F).  The member rate is .22 per contract.  The retail rate is .80 per contract.  You save .58 per contract.  If you trade 264 emini round turns a day, the seat pays for itself in one year.  If you are going to be trading for awhile, say ten years.  Pay 100k today and the seat only costs you $45 a day to own.

If you are trading futures, you can’t afford not to buy a seat. If you don’t trade futures, this is a lot better way to do asset allocation into the commodity space.  Instead of worrying about the price of an individual commodity, you get to profit off the increase in volume from interest in those commodities.

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