CME Data Fee Increase

$CME Group increased fees this week.  They increased and changed the way they charge fees to traders on products, but the fee increase that everyone in the industry is more than ticked about is fees on data.

The change in trading fees was a long time coming.  CME hadn’t done much with its fee structure to traders for a while.  Expiration of the group that oversaw fees allowed them to change fees on former CBOT and NYMEX products.

Industry lion and former CBOT chair Les Rosenthal wrote a letter addressing the data fee increase from his perspective.

From an independent trader perspective, the CME fee increase sticks it in their shorts.  It increases the cost to trade.  When traders were on the floor, they generally specialized by trading one or two products.  Electronic trading off the floor has allowed many traders to expand to other exchanges and other products while trading the one they specialize in.  The CME fee increase will cost the independent trader an extra $340/month; $4080/yr.  Increasing fees could cause many of the independent traders to limit what they trade and decrease volume.

I remember when I was chair of Wireless Headset and I got static from board members for simply wanting to set fees where we were break even!  My proposed fee increase didn’t pass.

There is room for a lot of innovation in the financial industry.  Albert Wegner posted his thoughts on IPO 2.0 today and I agree with him.

The extra money per month doesn’t seem like much. But, the independent trader has been nickeled and dimed to death by CME ever since the exchange killed the floor.  In pit trading, the cost to trade was trading cards, a jacket, and your seat.  Going off the floor, the trader bears the brunt of buying a fast computer, office space, front end provider, data provider, and other small little costs that become death by a million little paper cuts.  Increased data fees are a way of piling on.

This ignores the fact that the game has changed and independent traders no longer have the competitive edge they once did.  That went to the big boys.

The most important point isn’t the battle between independent traders and the rest of the marketplace.  Mr. Rosenthal makes the point that over the past two years, the futures industry has been affected by a series of transgressions (MF GLOBAL) , scandals (PFG), bankruptcies (Alphametrix) and victimized by an aggressive Washington DC regulator (CFTC). Dodd-Frank that has lowered confidence in the overall industry and artificially increased operational costs for everyone.  A recent Bloomberg article shows the lack of profitability in managed futures via big banks.

Public relations has failed to respond adequately to increase confidence. Right now, the futures industry carries a pretty big black eye when it comes to finance.  Thank you Jon Corzine.

CME and the other futures exchanges haven’t done that much to change the perception.   Instead of being proactive, they have been reactive.  How long did it take CME to respond to MF?  Did $ICE ever respond?  Instead of being collaborative, they have been dictatorial.

Les would have liked CME to have a dialogue with market participants.  To Mr. Rosenthal I would say “Get in line.”.  Since demutualization, the only market participants that get attention are the big banks and big prop shops.

What we are seeing in the futures industry is more volume, but less breadth.  Eventually, it will be left with a small number of players providing liquidity for a shrinking universe.  Many of the people that need futures markets to hedge will go to independent OTC derivatives because of all in costs and loss of market confidence.

Traders I know are leaving the futures industry to trade in the SEC regulated equity and equity options industry.  They have more opportunity, and lower fixed costs of trading.  It used to be the other way around.

Market data revenue for CME was $427.7M in 2011.  In 2012, it was $387.1.  That shows that less people are demanding their data-but those people are trading more volume.  Industry concentration.

CTA’s, IB’s, and Independent traders are drying up.  Businesses servicing that market group are having a tougher go of it.  It’s getting more costly to start an effective HFT trading house.  The futures industry used to be easy to enter, but now there are significant financial barriers to entry.

Unlike a lot of other industries, the futures industry sees data as a cash cow.  They haven’t figured out the Google ($GOOG) model where you give the data away for free and monetize the heck out of it.  It’s not clear how they would do that in the short term.

Futures industry structures, like the FIA or NFA have been way behind the curve.  They aren’t thinking out of the box about how to expand the breadth and reach of the industry.  MF Global showed the world how back on their heels they were.  They haven’t gotten up off the canvas yet.

Instead of driving meaningful innovation, the industry is busy seeking protection in Washington.  Lobbyists make more than independent traders.  The CFTC has done a lot to harm the overall industry in the past five years.

Futures markets are totally ripe for disruption.  It will be hard because of Washington DC, and the customer acquisition costs to set up a working market.  But, someone might be able to figure out a different way.

CME’s fee increase on data will only open doors for innovators to figure out a better way.   When they do, exchange management will have to listen to its customers.  Remember, Sears ($SHLD) didn’t see Amazon ($AMZN) coming either.  They had the same attitude towards their customers as futures exchanges do today.

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