(Adds comment from CME Group.)
By Sarah N. Lynch Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- More than 30 floor traders say they fear a proposed block trading rule by the U.S. Commodity Futures Trading Commission could give futures exchanges too much power in deciding when a block trade is appropriate.
The proposed rules seek to clarify the guidelines on how futures exchanges set the parameters of block trading, or privately negotiated off-exchange trades cleared by an exchange. If approved, the rules would give exchanges some flexibility in determining when an order is large enough to merit a block trade. But critics say that block trades stifle competition and harm smaller players on the exchanges.
"Our commodity exchanges have existed for centuries based on the free-market notions that everyone is allowed a fair price," said Ravi Etwaroo, a self-described market maker in the IntercontinentalExchange Inc.'s (ICE) cotton options pit, in a letter to the CFTC. "By allowing off-exchange, non-competitive transactions to be cleared through the exchanges, we will watch the eventual demise of the U.S. commodity exchanges as a marketplace."
Federal regulations require that markets remain "open and competitive," but block trades are permitted if there is a compelling reason for them. They can be useful when a centralized exchange can't provide liquidity for large orders. A more recent high-profile example of a block trade occurred in September when CME Group Inc. (CME) allowed the troubled American International Group Inc. (AIG) to unwind some of its positions through block trades.
In more than 30 comment letters sent to the CFTC, brokers, traders and market makers have raised concerns that block trades harm the transparency of the marketplace and they fear the exchanges will act only in the interest of shareholders if they are allowed to set block trading standards under the current proposal.
"The current guidelines are inadequate in that they provide, as is intended, broad guidelines which an exchange may use to determine appropriate minimum block trade size," writes Andrew Greenberg, a trader and manager for Prime International Trading Ltd. "The problem is that the exchanges cannot and indeed should not be charged with making this determination."
As an alternative, traders argue that commodity committees comprised of traders, producers and others should set the size standards - not the exchanges.
The proposed rules would allow block trades to be used when a transaction is so large that it would need to be broken up and executed at different prices. To determine the minimum size for a block trade, the rules suggest that exchanges should calculate "a minimum size based on market liquidity and depth" or rely on interviews with floor brokers. It also offers guidance on permitting block trades between affiliated companies and how quickly exchanges must post results of the trades.
The rules are similar to the block trade rules that exchanges have already set for themselves, but many traders and brokers said they believe block trades should be kept to a minimum and the CFTC guidelines need to be much stricter.
The proposed rules are an amended version of rules first considered in 2004. At that time, the CFTC suggested that an acceptable minimum size for a block trade would be a transaction that is greater than 90% of the trades in a relevant market. For new contracts with no trading history, the CFTC suggested 100 contracts would be a sufficient size.
In a letter, CME Group criticized those figures, saying they were too arbitrary. The latest proposed rules were drafted in response to feedback the CFTC received from comment letters.
CME Group has asked for an extension to the comment period, and hasn't yet submitted its response to the proposed changes.
"We recognize the value of block trading to the marketplace and continue to work closely with the CFTC on this subject," a CME spokesman said.
- By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com
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(END) Dow Jones Newswires
November 24, 2008 16:49 ET (21:49 GMT)

Publié le 24 novembre 2008 Copyright © 2008 Dowjones