July 6, 1999

Commodities

Lease Price for CBOT Seat
Hits a Record at $10,355

By PETER A. MCKAY
Dow Jones Newswires

The most rapidly rising rent in Chicago doesn't come with a doorman.

At the Chicago Board of Trade, the average price to lease a full Chicago Board of Trade membership seat hit a record of $10,355 a month in June, even as the price to own the same seat improved but remained well below its peak.

In the past year, CBOT lease prices have almost doubled under record demand by traders who want to participate in -- but not necessarily own a piece of -- the largest American derivatives exchange. For a growing constituency of lessors, that has meant increased income and more clout -- sometimes wielded from sunny retirement villas in Florida rather than the Windy City.

But some market watchers say the renters' ambivalence -- or inability -- to actually buy seats demonstrates many of the uncertainties the CBOT and other U.S. derivatives markets must erase as electronic trading and foreign competition loom in the near future.

"The main thing that the lessors are worried about is protecting their investment, regardless of what that means to the exchange," said Ray Cahnman, a CBOT member and chairman of the Chicago futures brokerage Transmarket Group. "But this system where so many people are renting also means that a lot of the Board of Trade's finances are on the backs of its weakest players, the seat renters."

Market watchers agree that the same factor that drove lease prices down sharply a few years ago at CBOT and the Chicago Mercantile Exchange is the same one shoring up lease prices now. Seats at each exchange fell to lows last year, in large part because members worried that expanding opportunities to trade futures and options electronically would threaten the Chicago markets' open outcry trading.

CBOT seats, which had fallen from a high of $857,500 to a low of $390,000, have since recovered to the $620,000 paid for a full seat on Thursday. In large part, members showed their confidence in CBOT executives' electronic strategy in May, when they voted by a six-to-one margin to approve the development of a computerized trading system with Eurex, a German-Swiss all-electronic exchange.

However, that doesn't necessarily mean market participants are again snatching up seats for themselves. Instead, the tendency to lease seats represents a lingering wait-and-see attitude about the CBOT's future, many members say.

Peter Todebush, a retired CBOT vice chairman, leases his seat to an options trader on the Chicago Board of Options Exchange, which was started as a CBOT offshoot. CBOT seats carry CBOE trading rights.

"Really, the seat price is irrelevant; it's the opportunity to make a profit that people are paying for," said Mr. Todebush, who now lives in Naples, Fla. "Right now, it's the CBOE that's propping up the Board of Trade seats, since the CBOE is where the profit opportunity is."

Since stock-options trading has been wildly popular in recent years, CBOE seat prices have sold at a premium to CBOT memberships for more than a year. A full CBOE seat still costs about $45,000 more than a full CBOT seat. That previously led to a practice called "seat arbitrage," in which options traders would sell CBOE seats to buy the less-expensive CBOT seats. Although traders on both exchanges agree that practice has died down in the past few months as the price gap to buy seats has narrowed, a type of arbitrage is now beginning to spill over into leasing instead, some say.

That can effect the markets themselves, says Mr. Cahnman, who rents out two of the three seats he owns.

For example, he said the CBOT's grain pits, which have seen declining prices in the face of bad weather and oversupply, could benefit from the liquidity more traders would provide, if there weren't so many CBOT memberships being used to trade stock options across the street.

"The rents these seats are fetching right now are an awfully steep price to pay if you're just starting out," he says. "And obviously, if you're going to pay that much money, there's more money to be made trading options than wheat."

That's not to say that CBOT members aren't thankful for the CBOE's effect on their seat prices. Without such a link, CME full memberships, which peaked at $925,000 in 1994, have been hovering around $300,000 in recent months. The lease for such seats is $2,650.

In commodities markets Friday:

SOYBEANS: Futures eroded to 26-year lows Friday at the CBOT amid forecasts for the biggest U.S. crop in history.

Ideal growing conditions and record acreage will result in the most massive soybean production ever, analysts said. Only a drought of fierce proportions could change this bearish scenario, but none appears to be on the horizon.

Nearby July soybean futures fell 11.75 cents to $4.305 a bushel, the lowest close for a front-month CBOT bean contract since January 1973.

July soybean-oil futures slid 0.12 cent to 15.97 cents a pound, the weakest nearby settlement since 1986.

"It's downright depressing," said Richard Pottorff, analyst with Doane Agricultural Services, a consulting firm in St. Louis. Nearby beans set historic highs above $9 a bushel just two years ago.

CRUDE OIL: Futures gained at the New York Mercantile Exchange due to technical buying, or buying prompted by patterns traders identify in price charts. The August contract rose 30 cents to $19.69 a barrel, having hit a high of $19.70, the highest price since November 1997.

"The trend is your friend. Until the market tells otherwise, we're heading higher," said one analyst. "It looks like crude is going over $20 a barrel." Bulls were encouraged by inventory reports released earlier in the week, which showed strong gasoline demand and confirmed a downtrend in U.S. petroleum stocks.

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