How To Save Big on Trading Costs And Put Money In Your Pocket

 I don’t own any seats at any exchanges anymore, but I used to.  When I traded Eurodollars ($GE_F) at $CME back in the late 80s and 90s, I traded so much each day that buying a seat paid for itself in one year.  I thought I might share with you part of my statement from last month-and let you do your own calculus.  I have an account through TDAmeritrade ($AMTD), and at the beginning of the month I paid a higher commission rate than I did at the end of the month.  I left out the gross and net profit.  

 TOTAL COMMISSIONS 6,055.00- 

 TOTAL CLEARING FEES 202.08- 

 TOTAL EXCHANGE FEES 113.60-  

 TOTAL NFA FEES 36.52-  

 TOTAL GLOBEX FEE 215.84- 

 TOTAL ELECTRONIC FEE 1,987.12-  

I paid $8610.16 in Commissions

Suppose I bought a seat.  For purposes of this exercise, it would be an AM seat currently trading at $80,000 and leasing out at $540/mo.  My assumption is if you bought it-you’d pay cash or you’d put $40,000 down and pay a bank $741.18 per month.  (4.25% interest over five years).  I used the lease cost in my calculation.

Lease        -$540

Clearing    -$404.16

Globex Fee .06*3274=$196.44

Exchange Fee .31*3274=$1014.94

Front End      -$450  (CTS, Cunningham Trading System; they charge .20 per contract up to a cap of $450)

EMini Globex Fee .76*264=-$200.64  (breaking out and calculating full retail here because I don’t own/lease a B-3 at CME)

Commission 1.1*264=-$290.4  (same as above)

132 round turns in the S&P Emini  ($ES_F)

1637 round turns in the CBT T-Bonds ($ZB_F)

Net difference is $5489.54 ($65,874.48 per year in my pocket)

That’s quite an economic incentive.  However, it’s not so simple to execute.

What if you were a newbie and didn’t know anyone to talk to?  What do you do?  If you are a customer of a large retail brokerage they might help you get a seat-but they are still going to charge you commission so you don’t save that much-only exchange fees.

CME doesn’t make it easy either.  It is hard to navigate their site to find memberships, let alone find the leases for them if you aren’t familiar.  Then there are all the fees the exchange larders on to go through membership.  There is a $2000 application fee to do paperwork for example.  You’d think an electronic exchange could code a software package to save you time and money on the process.  Sounds just like a government agency!

Not only that, CME’s fee structure would be the envy of the Byzantines.  To say it’s complex is an understatement.  CME doesn’t have an economic incentive to encourage traders to become members since commission that they collect would go down.  For example, in the E-mini if you are a retail trader, you pay $2.40 to the exchange.  If you were to lease a seat, your fee goes down to $.785.  If you own, $.555.  The difference between retail and member rates is significant.  Typically, futures brokerages charge less than retail brokerages as well, so that is another cost savings.

If you trade a fair amount, you need to contact a futures firm to establish a brokerage account.  I use Shepard, and I have used them for years.  (312) 341-7888 is their number. It’s a small boutique firm with high service. There are plenty of other clearing firms like Dowd-Wescott, RJ O’ Brien, Rosenthal-Collins, and FC Stone.  The futures firms will help you get a seat.  If you lease or own a seat, you might not have to pay NFA charges either, another cost savings.

There is a seat cartel at CME that has existed for over 20 years.  They used to try and control the supply and demand for seat leases.  At CME back in the days when trading was only open outcry, the broker groups that dominated the floor broker industry would try and hold seat leases down so they could trim their fixed costs.  They were at odds with the equity owners that wanted the highest price possible for seat leases.  Today, if you own a seat and want to lease it out it’s almost impossible to do without going through the cartel.  You have to pay them at least one month’s seat rent for the honor” of using the cartel.

At the CBOT there is a formula they use to calculate seat leases based on the sale of the actual seat.  Leases at CME can be weekly, month to month or in other permutations.  At CBOT you have to give 30 days notice.  I don’t know NYMEX/COMEX lease policies, but you do save money leasing versus retail.

The CBOE is a whole different ball of wax and I hope someone leaves notes in the comments how to save on trading costs there.  I honestly have no idea and can’t figure it out from their website.

CME never attempted to smooth over the differences between the two exchanges when it bought them.   I always thought this was a strategic misstep.  It also hurt seat owners that traded.  There was no benefit to them when CME decided to buy another exchange.  If you owned at CME, you had to pay full retail at another exchange and vice versa.  CME should have set up some sort of cross exchange price for equity owners equal to the electronic rate.   Instead of breaking down barriers-they kept them up and made it even tougher.  The reason is to extract more profit out of traders using 1st, 2nd, 3rd degree price discrimination.  CME also doesn’t get any revenue when a seat is leased, so they have zero economic incentive to do anything about it.

Since the MF Global debacle and Dodd-Frank, it’s become more arduous to set up an account.  Now, there is a lot of paperwork and you have to put a decent amount of money in your account.  That’s why I think retail brokers like TD Ameritrade and Schwab would be smart to set up clearing operations directly at CME.  I think they could get a lot of business because you’d have all your money in one place to allocate for various trading activities.  If CME were smart, they’d recruit them.

If you are trading 10 emini round turns a day, you should be leasing (That’s trading 220 round turns per month).  Leases are $300/mo.  The cost savings is $1.61 per contract or $3.22 per round turn.  I just thought I’d share you the difference.  Hope it helps you cut your fixed costs.  Leasing or owning could mean the difference between profit and loss for a lot of people.  You are taking all the risk, you might as well reap the full benefit.  There are a lot of hoops to jump through but for many traders it’s probably worth it.

 Would be helpful if equity owners that read this blog weigh in below.



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