The Great CME Shrinkdown

Are the days of record volumes at Chicago’s CME Group a thing of the past? As the floors crumble the CME has decided not to move the grain room into the financial room and combine the CME and CBOT trading floors once and for all. The problem? After such a move there would be no one left to move.

That said, it takes a tight ship to sail through rough waters and consolidating the floors would cut costs in the long run. Such a move has been in the cards since the CME bought the Board of Trade and it would make sense now. It’s not like the floor is overcrowded.

After Effects of the Big Party

We have always said there was a big party on Wall Street and that extended to LaSalle Street in Chicago but as the credit crisis reared its ugly head and MF Global and PFG stole or misused customer-segregated funds there was already a big sea change under way. Investors in stocks and bonds had already been blown out and the futures and options customer base was in a downward spiral. I know people in the industry don’t like to talk about it but many of the big clearing firms and IB’s are desperate and don’t know what to do. One broker I talked to yesterday said if he “downsizes anymore” there won’t be anything left.

JP Morgan and UBS, Credit Suisse and all the others

If any of this sounds bitter you’re reading this wrong. I left the floor in November of 2013 after working down there for nearly 37 years. I will never talk bad about the guys in the pits but there is a stark reality going on both at the NYMEX and the CME trading floors; people are leaving.

There are 3 types of people left on the floors; 1) the desk guy putting the order into the pit 2) the broker that fills the option order 3) the local or prop trader that got on the other side of the trade. The CME isn’t asking anyone to leave, it’s attrition. If you’re not making any money you have to go.

A few months ago JP Morgan closed their S&P 500 SPM desk. Instead of going to its trusted employees and telling them to go to a new firm and do the business it was solicited away by another firm. Last week UBS shut its S&P desk down and I heard Merrill is getting close to do the same.

There is no loyalty to any of the people who worked for these firms. Many of them, like JPM and UBS, made their employees go to work for a shell firm years ago so when the time came to close the operation they wouldn’t have to pay any severance. I know the UBS desk guys got nothing for staying loyal to their firm.

Broken Business Model

The days of buying and selling using the “open outcry” style of trading are coming to a close. Sure there are still a few futures orders to fill in the S&P pit and the Eurodollar futures and maybe on the opens and closes in the meats and grains but the CME is well beyond its threshold for closing most of those futures pits.

Either way, there does not appear to be much of a plan other than to let the floor and its inhabitants just drift away. Even the open outcry options pits are beginning to slow as more goes on the electronic platform.

Conclusion: The glory days of the trading floors are long gone. What’s left are big trading floors with fewer and fewer people on them. This has been a work in progress for a very long time. We knew after MF Global and PFG was a turning point for the floor and it looks like the decline has accelerated. There really is no bringing the floors or the volumes back because as we have always said: if you can’t pay your mortgage you’re probably not trading futures and options.

The Asian markets markets closed mostly higher and in Europe 8 out of 12 markets are trading modestly higher. Today’s economic calendar has a slew of reports, including the Consumer Price Index, Jobless Claims, the Empire State Manufacturing Survey, Treasury International Capital, Industrial Production, Bloomberg Consumer Comfort Index, Philadelphia Fed Survey, Housing Market Index, E-Commerce Retail Sales, EIA Natural Gas Report, Fed Balance Sheet, and Money Supply, as well as bond and note settlements and announcements. New York Fed President William Dudley speaks to a small business credit conference in New York and Fed Chair Janet Yellen speaks in the evening at a Small Business Administration event in Washington. Earnings reports are due from Wal-Mart (NYSE: WMT), Aviva AV, Applied Materials, Inc. (Nasdaq: AMAT), Nordstrom, Inc. (NYSE: JWN), Kohl’s Corporation (NYSE: KSS), and J.C. Penney (NYSE: JCP).

Our view

The main question people should be asking themselves is where did all the volume go? Last night’s total Globex range was only 6.25 handles. The big concern is what’s this going to look like over the summer when people start taking time off. I think it’s possible we see ES volumes of under 800,000 contracts a day.

The industry as a whole is in its worst shape in 30 years. All the exchanges letting algos steal our money is having a wearing effect on the entire industry.

Our view is, we figured that S&P would stall and fall short of 1900 and it did. We have said to be cautious as we approach 1900 and we still feel that way. We lean to buying the early weakness and selling rallies. After such a big push the ESM14 has to rebuild trust and the only way to do that is to lure the shorts back…

Our Friend Cyrus did a study of what I have been talking about for months. He ran a quick study using the following constraints:

1. New 50-day high
2. Volume below 30-day average
3. Since 1965

He found that the market’s price movement under those conditions was bullish over 6-month and 12-month time periods, but mildly bearish for shorter time frames. Cyrus points out, “This matches with your intuition … a pop up to new highs leads to a period of consolidation and pullback …”

As always please keep an eye on the 10-handle rule and please use stops when trading futures and options.

• In Asia, 7 of 11 markets closed higher : Shanghai Comp. -1.12% , Hang Seng +0.66%, Nikkei -0.75%.
• In Europe, 8 of 12 markets are trading higher : DAX +0.16%, FTSE +0.17%
• Morning headline: “S&P Futures Seen Lower Ahead of Inflation Data”
• Fair Value: S&P -3.18 , Nasdaq -2.20 , Dow -31.77
• Total volume: LOW 1.18ESM and 7.4k SPM traded
• Economic and earnings calendar: Consumer Price Index, Jobless Claims, the Empire State Manufacturing Survey, Treasury International Capital, Industrial Production, Bloomberg Consumer Comfort Index, Philadelphia Fed Survey, Housing Market Index, E-Commerce Retail Sales, EIA Natural Gas Report, Fed Balance Sheet, and Money Supply. Bond and note settlements and announcements. William Dudley and Janet Yellen speak. Earnings from Wal-Mart WMT, Aviva AV, Applied Materials, Inc. AMAT, Nordstrom, Inc. JWN, Kohl’s Corporation KSS, and J.C. Penney JCP