Eurodollar Options Traders and CME

Posted: Apr 17, 2012 12:01 AM

CME decided to tell the options traders that walked out of the pit to take a hike. It’s becoming a high stakes game of chicken. Believe me, behind the scenes CME is calling everyone it knows to make markets in Eurodollar options. Might even be an electronic incentive program started soon.

CME executives, including Phupinder Gill, the company’s next CEO, met with floor traders who boycotted the options on Eurodollar futures pit on Friday morning, depressing volume, said David Stein, a trader who attended the meeting.

“The exchange is not interested in changing anything,” Stein said.

Floor traders claim that the way large, privately negotiated trades are handled puts them at a disadvantage.

Frankly, the floor traders are at a disadvantage. They are getting picked off. The way trading is happening would tick me off too.

This is the opportunity for another exchange to steal the contract. The Eurodollar Option locals are pretty helpless against the CME ($CME). If the locals do in fact provide the lion’s share of liquidity and no one can transact business efficiently, another exchange should list the product with different rules and pay the locals to come over and begin making markets there. The newly listed product would have more liquidity, with better B/A spreads and would take volume. My gut tells me who ever owns the options in a particular futures contract will get the futures too.

Over the course of time they could arb their positions from one exchange to the other. Might even make some money doing that. We used to back in the day when we arbbed London’s LIFFE vs CME’s Eurodollar.

If CME is correct, and liquidity doesn’t move with the disenfranchised locals, then they will have to shut up and take it. Or, change how they do business, or fold up their business altogether.

If I were the CEO of another exchange, especially the CBOE ($CBOE) that has a lot of empty real estate and a CFTC license, I might be on the phone to those guys.