CME Group Inc. Executive Chairman Terrence Duffy on Monday defended a controversial decision to consider electronic trades when settling grain prices as “the right thing to do,” as a trial over the move entered its second day.
Traders who work in the open-outcry futures pits on the Chicago Board of Trade's 140-year-old agricultural trading floor sued CME, which owns the CBOT, in June 2012 to halt settlement rules that factored in electronic transactions, saying the change would kill their business.
Traders argue that CME failed to hold a required vote to approve the change among certain holders of CBOT memberships. CME, the largest U.S. futures market operator, says it did not need to take a vote.
Prior to the change, the CBOT had a century-old tradition of settling futures prices for crops like corn and soybeans based on transactions executed in the pits.
Duffy said in court that it was proper to include electronic activity in the process because a majority of the volume in agricultural markets is executed electronically. The former method of settling prices based solely on open-outcry activity excluded electronic traders from end-of-day trading, he added.
“It's a fairness issue,” Duffy said when a defense attorney asked him why he approved the change.
Duffy was the second high-profile CME executive to testify during the trial. Chief Executive Phupinder Gill appeared on Friday in the same small courtroom in downtown Chicago.
On Monday, open-outcry traders packed the few spaces available for spectators. Befitting their reputation as a rowdy bunch, Cook County Circuit Court Judge Jean Prendergast Rooney scolded some for talking while witnesses were testifying.
CME implemented the revised settlement procedure for corn and soy futures last year after initially proposing to make the change in livestock markets as well. The exchange operator did not adjust the rules for livestock trading because it did not have as much data regarding market participants in the livestock markets, Duffy said.
The U.S. Commodity Futures Trading Commission, which oversees CME and the CBOT, also had expressed concerns about the practice of basing end-of-day grain settlement prices solely on open-outcry activity, Duffy and Gill said separately.
Informal discussions about a potential change to livestock settlement rules have continued, they said.
Lawyers for the traders have said it was wrong for CME to apply the settlement process to the grain markets if it was not changing the rules for livestock. The pit-based settlement process was not in violation of CFTC rules, they noted.
Despite being well-known markets and a part of the CBOT's history, corn and soy account for only a slice of CME trading. Average daily volume in CME's agricultural commodity markets during the third quarter was 1,009 contracts, compared with 5,839 contracts for its flagship interest rate products.
Ralph Dynek, a trader in CBOT's corn pit, said his trading volume and income have tumbled as a direct result of the revised settlement rule took effect last year...