CHICAGO (CN) – New regulations for electronic stock trading will eliminate jobs and violate shareholder rights, a group of open-air pit traders for agricultural futures claim in court.
Andrew McKerr and 24 other traders brought their suit as shareholders, or leaseholders of such shares, of CME Group and its subsidiary, the Chicago Board of Trade (CBOT).
CBOT runs an exchange for trading futures contracts for corn, soybeans, wheat and rice. The CME Group operates an exchange for live cattle and hog futures contracts.
“Plaintiffs have been forced to bring this lawsuit against defendants for injunctive and other relief in order to obtain redress and protect their jobs and livelihoods and those of the CBOT’s members, who are shareholders of the CBOT and CME and trade agricultural futures and derivative contracts on the open outcry floor exchanges of the CBOT – known as the ‘pits,'” according to the complaint in Cook County Court.
“Historically and to date, one of the main functions of the open outcry system in the ‘pits’ – and those who trade of the CBOT and CME floor – is to determine final settlement prices at the end of the trading day based upon supply and demand of competitive orders placed by traders, brokers and customer end users either verbally or in writing during a designated closing range time period.
The shareholders say CME announced last month plans to change the procedures for “determining settlement prices whereby all final price settlements are to be determined by using as algorithm based on a mixture of floor and Globex (electronic trading) information, instead of based on floor-based trading activity for CBOT Agricultural Futures.”
“This will cause – and as this complaint was filed, has already caused – a rapid, dramatic decrease in trades being sent to the plaintiffs in the ‘pits,’ with the result that they, and the overwhelming majority of other floor traders, will lose business almost immediately and will have to close their operations forever,” according to the complaint.
CBOT membership or ownership of Class B shares is a requirement to trade in the pits, according to the complaint.
“Defendants’ decision to make this change is in violation of their fiduciary obligations to plaintiffs as Class B shareholders of CBOT and shareholders of the CME by failing to take steps to maintain and support the open outcry system as required under the respective certificates of incorporation of the CBOT and CME,” the traders say.
Section E of CBOT’s certificate of incorporation states: “The corporation shall maintain open outcry markets operating as of April 22, 2005. … The Corporation may discontinue any open outcry market at such time and in such manner as it may determine if: (1) the Board of Directors determines that a market is no longer ‘liquid’ or (2) the holders of a majority of the voting power of the then outstanding Series B-1 Memberships and Series B-2 Memberships, voting together as a single class based upon their respective voting rights, approve the discontinuance of such an open outcry market.”
The traders say that CBOT and CBE never consulted with them, “any other Class B open outcry traders or their clients prior to issuing the Special Executive Report designed to change the settlement rule.”
An electronic settlement system also allegedly presents dangers. “Because an electronic system calculates settlement prices immediately without reference to the activity on the floor, ‘flash crashes’ and other issues can occur under that system, which can have a detrimental effect on the overall economy,” the complaint states.
“If a blended settlement is adopted to now include electronically traded prices during the closing range, based upon volume weighted average prices, high frequency traders will control unfettered by supply and demand the settlement price,” the traders added. (25)
The lawsuit against CBOT, CME Group, CME President Terrence Duffy and CME CEO Phupinder Gill seeks an injunction and damages for breach of contract, and breach of fiduciary duty.
George Sang of Schoenberg, Finkel, Newman & Rosenberg represents the traders.