We have little doubt the proposed fee increases, particularly for market data access, will have a profoundly negative impact on the number of industry service personal (IBs and Aps) as well as retail speculators. Consequently, we suspect the changes could trigger a potential drop in trading volume in our particular book of business by 20% to 30%. Additionally, small operations such as ourselves could be driven out of business at the hands of decreased volume and substantially higher fixed costs in the form of data fees.
Here are some comments and concerns we would like to express:
Data fees per device is unreasonable, and dramatically impairs the industry
In a post PFG and MF Global world, IBs have shifted toward independence. We have spent the last 2 years scrambling to diversify our business among various FCMs. Accordingly, that involves the simultaneous use of multiple platforms. Should the new CME fee structure be charged per device, the cost to the average broker would be astronomical. For example, we have clients spread between about 8 trading platforms; this could potentially trigger an expense of close to $3,000 per month per broker. Many brokers in this business fail to make enough in commission to cover this expense and will simply be forced into a career change.
Excessive burden on the members of the industry least capable of bearing the load
Unfortunately, discount brokerage firms have led to the cannibalization of the industry. As time goes on, commission rates go down, making it even tougher for IBs and APs to make a living in the futures industry. In many cases, the round turn expense charged to clients for commission, clearing fees and platform fees combined are less than the CME Group’s standard exchange fees.
Simply, it is irrational to ask the party making a nickel or two per trade on the clients he has worked hard to acquire to bear the brunt of the expenses, while the CME makes $2.60 per trade on each and every trade executed by the clients of ALL retail brokers.
Deter clients/broker from spreading risk between FCMs
Charging excessive data fees for each device will undoubtedly prevent brokers from recommending clients allocate funds between multiple FCMs to protect against a PFG or MF Global repeat. As a result, client funds and the “books” of brokers will lack the safety and peace of mind diversification can offer.
In my opinion this will likely discourage larger trading accounts, and therefore, have a negative impact on volume and risk management.
Fewer brokers to solicit clients to trade
The CME Group’s policy of charging professionals data fees per device is a gross underestimation of how important brokers are to the industry. Both discount online and full service retail clients are largely attracted to the industry by the marketing efforts of brokerage firms, IBs, etc. The new CME fee policy will likely nearly immediately reduce the number of IBs and brokers (APs) simply because they won’t want to work hard to pay CME fees without a paycheck for themselves.
Prevent brokers from properly monitoring and managing client risk
The hefty burden of data fees necessary to keep multiple platforms running will lead to far less risk management. For instance, there are some platforms in which we only have a few clients. Paying several hundred dollars simply to continue having broker access is unreasonable. Should the proposed fee structure be implemented, we will opt to forgo access to certain platforms. Not only does this hinder our ability to service clients (place orders for them, verify positions/orders, etc) but it will nearly eliminate our ability to monitor the debit risk of these clients. The decreased level of risk management is a liability to the brokers and IBs, as well as the FCMs, and even the CME Group.
Fewer brokers to retain clients (help them avoid common pitfalls, provide basic trade support)
If our assumption is true and the fee increase leads to fewer brokers; the impact to the industry will not stop at the diminished ability to open new trading accounts. The trading accounts that are opened are likely to be less successful; consequently, they will trade lower volume over a shorter time frame. This is because brokerage firms of all service levels (deep discount or full-service) will be less efficient at providing quality client services that are imperative to help clients survive the treacherous world of leveraged speculation.
Deter “come and go” clients from participating at all
We’ve made a good living over the years servicing clients that “come and go”; so has the CME Group. For example, a client might trade for a month or two, and then take several weeks off. Most leave funds in their account in preparation of the next round of trading opportunities, others don’t. In any case, we believe that many of these types of clients will find the hassles of data fees during their down time could deter them from participating in the markets at all. Particularly those that tend to leave funded accounts inactive for moderate periods before resuming trading again; the fees will encourage them to take funds out of the account to avoid data fees and they might never come back. We’ve all worked hard to provide a convenient environment for futures traders and it is evident in trading volume, but consumers are fickle; they might find new hobbies or interests.
Any additional data fee revenue will likely be overshadowed by loss in volume trading fees
The CME Group is assuming increased data fees will increase their overall revenue, but this is probably a fallacy. We all know that volume based revenue has the potential to far outweigh subscription fees in this business. In this instance, we strongly believe increased data fees will be a substantial obstacle for brokers and retail traders to generate trading volume. Accordingly, the higher data fees could very easily be dwarfed by the drop in transaction fees.
It is impossible to predict the future, but we estimate that volume amongst our clients could see a 20 to 30% decline as the new fee structure weeds out many small retail traders. Individually, their impact is minor but as a group these traders make a significant impact on transaction fee revenue for both the CME Group and brokers.
CME is the only party that has control over its expenses, it is unfair to ask parties lacking control to carry the weight
Any money problems the CME Group is experiencing, arguably isn’t at the hand of a lack of revenue. Transaction fees on retail trading business ranging from $0.80 to $2.60 adds up to a substantial amount of money every trading day. Rather than cripple an industry still trying to recover from PFG and MF Global, there must be ways the CME can cut expenses such as delisting illiquid products.
Forcing users to pay for open outcry data is inefficient
On the surface, it appears as though the proposed data fees are a way to force market participants to pay for open outcry data. However, very few traders or brokers need, or want, access to open outcry information. If the CME Group cannot justify the costs of disseminating pit data under the current fee structure, perhaps it should consider dropping the service in markets in which it makes little economic sense; or maybe even altogether. Expecting uninterested users to reluctantly carry the burden is inefficient and counterproductive to industry growth.
Speculators will likely migrate to stocks (deposits are guaranteed and data is cheap/free)
Although the CME Group controls most of the market for U.S. futures, speculators have other options. For instance, we suspect traders will migrate to Eurex products, equities, and FOREX to avoid paying data fees. It is important to recognize that when people are accustomed to getting something for free, they have a hard time adjusting to any type of pay for use model.
Brokerage firms and platform vendors have spent substantial amounts of money on development, with the assumption of the pre-existing fee structure
Software development takes a considerable amount of time and money; as the futures markets turned to electronic trading and data distributions, brokerage houses and platform vendors allocated substantial resources to improve market access for retail traders. They did so with the assumption of the current fee structure, and with expectations of growth in the industry. The proposed fee structure might be substantially antagonistic to their efforts. In our opinion, this is an unfair burden.
Anti-trust violation?
The CME Group is by far the largest player in the U.S. futures arena, and is questionably running a monopolistic entity. Passing on what could potentially be crippling fees to IBs, FCMs, and other market participants in an environment that lacks competition is considered by many a potential violation of anti-trust regulations.
Carley Garner
www.DeCarleyTrading.com
cgarner@decarleytrading.com