From the February 2014 issue of Futures Magazine • Subscribe!

Who's looking out for the little guy? Apparently not exchange or regulators in 2013

For profit, for whom?

Buck Haworth’s family runs technology provider Born Capital, and he’s just one of several market veterans who say CME Group’s mandate to serve shareholders leaves users in the lurch. It’s a debate that arguably began when Olof Stenhammar founded OM Sweden as the first for-profit electronic options exchange in the 1980s – although for Stenhammar himself, the for-profit vs. non-profit debate was always wrong-headed. 

“Everyone is saying that demutualization drove down the cost of trading,” said Stenhammar in 2001, “but the reduced fees have nothing to do with whether an exchange is non-profit or for-profit and everything to do with technology.”

That new technology removed costly floor brokers and their support needs and replaced them with relatively inexpensive trade-matching engines. The shift from a non-profit model to a for-profit model may have speeded the transition, but it was technology that drove down costs. Haworth agrees.

“Before the floors started winding down, the customers paid all of the costs of the floor brokers and the floors themselves,” said Haworth in June. “When the markets went electronic, all of that money shifted over to the exchange. It was ‘found money.’ Now, it isn’t enough, so they want market data fees.”

It’s a quest that he says the Exchange began in 2010, when the CME data distribution department started peppering him and his staff with questions about their customers and their business plan. It seemed at first like a minor annoyance, because Born only deals with active traders who rack up considerable execution fees and traditionally have been exempt from data charges. But in November 2012, the Exchange told Haworth that, based on their answers to CME’s inquiries, Born Capital was now classified as a data distributor, and that meant they had to pay new licensing fees. When Futures asked the Exchange to explain the 2012 fee increase, CME Group sent us a 53-page market license agreement and directed us to Schedule 4, which implied that people who used APIs to analyze historical data – which is almost anyone who develops trading systems – could be charged a data fee. While the charge nominally refers to people who are distributing data, the criteria are vague and subjective and include this caveat: “CME reserves all rights to determine whether any compilation of data represents historical information in accordance with this definition.” 

By that definition, anyone who uses Excel or FIX (Financial Information eXchange protocol) should be subject to the 2012 fee.

A former CME board member, Haworth stopped answering questions and started demanding answers — and warning everyone he saw that massive hikes were afoot.

When the hikes came, they were not only massive, but camouflaged to such an extent that it took weeks for traders to realize what had hit them. It imposes fees on every trading screen, and it extends the definition of a “professional” trader to include anyone who is registered with the SEC or CFTC, any state securities agency, anyone defined as an investment advisor and anyone employed by a bank. It captures many smaller traders who are classified as LLCs. Now they are classified as professionals and subject to the data fees, which can top $670 per month, per exchange. It adds up quickly. While the Exchange has grandfathered some fee increases on established traders, those aren’t the ones Haworth is worried about.

“The lifeblood of any industry is the new people coming in with new ideas and new energy and new enthusiasm,” he says. “At the beginning, they need all the help they can get — especially in this business, where they usually lose money until they figure it out.”

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