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CME Confronts Traders' Ire

Zacks Equity Research

CME Group Inc. (CME) was sued by 24 brokers and traders of the Chicago Board of Trade (“CBOT”) last Friday. This was in protest of its declaration of doing away with the “open-outcry trading pit system” pertaining to agricultural trading and opting for a new process. The change was scheduled to be effective from June 25 after being postponed due to several oppositions since December last year.

The new procedure, as planned by the company, would discard open-outcry with the electronic trading information using a common algorithm. As a result, in anticipation of a negative impact, there was a sharp drop in volumes being traded.

This change may threaten the role of floor traders and many fears that they will lose their job if this change is brought into effect. However, this initiative undertaken by the CME Group is an effort to keep the exchange at par with the requirements of the federal Commodity Exchange Act and Commodity Futures Trading Commission.

If CME Group is found guilty, it would have to compensate for the damages in monetary terms. Further developments are expected to throw more light on the issue as the company continues to confront hurdles for entering the electronic trading platform along with intense competition, which has been affecting both volume and pricing of the exchange.

The company’s closest competitor, Nasdaq OMX Group Inc. (NDAQ), also faced the wrath of one of the IPO investors, who questioned NASDAQ’s failure to process orders to buy, sell or cancel requests for Facebook Inc.’s (FB) shares on time, causing them to suffer losses. The investors hope to obtain a class action status for a case filed against the company regarding this. The latter had tried to order and then cancel requests for Facebook shares but was unable to do so, owing to the technical glitch in the trading platform.

CME Group currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Underperform recommendation on the shares.

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