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More Novice Traders Are Jumping Into the Pits

September 8, 1995

As new futures contracts debut at a record pace, low-cost opportunities for would-be traders to jump into the hurly-burly world of the pits are proliferating.

While the cost of buying a membership on a big exchange like the Chicago Board of Trade or New York Mercantile Exchange exceeds $500,000, clerks, runners and other newcomers to the futures markets are finding that exchanges are willing, even eager, to give rookies a cheap way to hone their trading skills.

Take Kansas City, for example. A handful of ambitious clerks have deserted New York’s frenetic energy-derivatives markets to trade the Kansas City Board of Trade’s fledgling natural-gas-futures contract, launched Aug. 1. Seeking to drum up interest and boost trading volume, the exchange is offering newcomers the right to trade natural-gas contracts for two years for only $1,000. As a sweetener, it will allow permit holders who have maintained a minimum volume in the natural-gas contract for two years to buy class ``B″ seats on the exchange for only $5,000 more, about one-fifth of the current market price.

Making the whole deal more attractive, say those who have taken the lure and moved west, is that clearing firms in Kansas City will allow new traders to open accounts with as little as $15,000 in capital, compared with the $50,000 demanded of new Nymex traders.

``At least five of my close buddies are here,″ says Matthew Schwartz, one of several former clerks at the New York Mercantile Exchange who mourn the absence of good bagels and real Italian pizza but rejoice at ``graduating″ to the status of independent pit traders so quickly.

``It probably would have taken me another year to be able to even lease a seat on Nymex, let alone buy one.″ says the 24-year-old Mr. Schwartz. ``This way, I can start trading right away.″

Kansas City’s initiative is one of the most aggressive attempts by an exchange to woo new traders. But as more new products compete for attention in a crowded market, futures and options exchanges are increasingly interested in offering such incentives to novice traders.

Many are turning to permits to promote their new products. Most of these, like the proposed Coffee, Sugar & Cocoa Exchange fluid-milk-futures permit or the Chicago Mercantile Exchange’s Mexican peso-futures contract, restrict the holder to trading one new product. Others, like the CME’s general permit, allow the holder to trade some half-dozen low-volume futures and options contracts for only $6,000 a year, a fraction of the cost of leasing a seat on the exchange. While CME permit-holders can’t buy discounted memberships, and permits last only a year or 18 months, holders can move from one permit program to another.

``We want to attract new traders and people who want to learn how to trade,″ says Rob Chung, vice president of strategic planning at the CME. ``It’s more difficult to get members to support new products as the cost of access to the markets has gone up along with membership prices and the cost of leasing a seat.″

Leasing a seat on the exchange from a member remains the most common way for novices to get a taste of the trading in the pits. But as the cost of leasing a seat has hit a whopping $8,000 a month on some exchanges, many would-be traders say leasing has become just as unaffordable as buying a membership.

``It’s an expensive way to learn,″ says Jay Lubowsky, a natural-gas trader who quit New York’s gas-futures pit for Kansas City. ``It was becoming difficult for me to make money because everything I made went toward the $5,000 I had to pay every month for the seat lease. I was a long way from being able to buy a Merc seat.″

For those who crave the status and permanence that go with being a member of an exchange, the 127-year-old Mid-America Commodity Exchange is an increasingly popular destination. Long overshadowed by the CBOT and the CME, it’s emerging as a cheaper way to trade virtually the same products as members of both the two larger exchanges. The only difference: A seat at the Mid-Am costs only about $8,000, while buying one at the CME would set a trader back $750,000. And contracts are identical, except for their size: Financial-futures contracts are half the size of those listed on the CME or CBOT, while agricultural contracts are one-fifth the value.

Chuck Randoni, chairman of the low-profile exchange, says he expects the Mid-Am to attract about 75 new members this year, up from about 60 last year. ``You couldn’t open a hot dog stand for what it costs to start trading here,″ he adds.

``There’s less pressure to trade in large quantities and more chance to observe how the markets work and relationships between them,″ says Charles Carey, who spent nearly three years at the Mid-Am before buying a CBOT membership. ``Your lessons come cheaper.″

Mid-Am members don’t have to give up all the excitement of the big markets. Located between the CBOT’s two trading floors, and open 30 minutes longer, the Mid-Am often faces late-afternoon invasions by CBOT traders seeking to adjust their positions after frenetic activity in the soybean- or bond-futures pits. Still, the generally low-key mood is an advantage for rookie traders striving to decipher complex hand signals and master the minutiae of market movements.

``Going straight to the big leagues would have been pretty foolish for me,″ says Ernest Boone, a former veterinary surgeon who bought his Mid-Am seat two years ago, at the age of 61. ``It’s a good learning medium, and the pushing, shouting and yelling is less. People are polite and say sorry when they bump into you.″

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