Sunday, February 7, 2010

Special Post - Comprehensive E-Mini Commission Analysis

Prompted by a combination of various email & Twitter responses to my recent post on CME member commission rates (feedback greatly appreciated btw), as well as lots of confusion and lack of clarity (some purposeful) on the various rate structures involving non-members, lessees, and Electronic Corporate Memberships (ECMs) -- I haven't come across a single current comprehensive comparison -- I've put together what I believe is an accurate and detailed cost comparison of choices for traders seeing to reduce their expenses via the CME member route:

Snapshot Photo
Excel Version

Essentially, I lay out the four common choices: non-member, Lessee, ECM-H, and ECM-M.  (I chose to omit the fifth option of purchasing an Exchange seat which is out of reach for most and would introduce a host of other cost/benefit issues beyond this scope.)

For those not familiar with ECMs, the term refers to Electronic Corporate Memberships which are available to Prop Firms and whose commissions are priced in-between non-member and Lessee rates.  As noted on the CME ECM Q&A, an ECM-H still requires the purchase of a lease (two in fact) while an ECM-W (a temporary category) allows for a waiver of the lease so long as average daily volume is at least 50 contracts.

A few notes and observations from this end:

- I've highlighted the lowest total monthly cost given various volume levels in green.

- The analysis only reflects the CME rates.  FCM or Prop Firm commission setting & bundling is firm-specific and could have as many flavors as Baskins Robbins.  So consider the prefacing phrase "all things being equal ..." critical as you review the data.

- Given the lower commission rates -- and especially the substantial discount structure that kicks in for lessees after the 1st 150 avg daily contracts (which is not applicable for either ECM) -- the lessee option remains the most viable option for a single trader trading more than 150.  Below 150, trading with a Prop Firm (yours or somebody's) that doesn't have to pay for a lease under the current waiver based on volume has the slight edge since there's no trader lease payment.

- The slight advantage for a low volume ECM-W trader would quickly disappear should (1) the Firm impose a substitute fee or cost (profit sharing aside as mentioned below), or (2) the trader experience even some modest growth in volume following initial success beyond 150/day.

- The ECM portion of the analysis essentially reflects considering establishing a one- or two-person Prop Firm (vs. Leasing) just to realize the discounts, versus am existing larger firm that could spread the lease cost over a larger group of traders.

- The analysis also of course reflects a pure financial exercise and doesn't consider Prop Firm benefits such as access to capital, shared infrastructure, risk controls, education, etc. or drawbacks such as having to share profits with the firm.  Our good friend Dr. Brett has done some solid posts on Prop Firms pros and cons ... just do a search on his site for "Prop Firms".

I encourage discussion via comments, including any corrections to the data which I culled from the CME's rate schedules and their ECM Q&A.

I hope you find the analysis useful.

4 comments:

T said...

Hey Don,

What great information. Thanks so much for your hard work in putting this together. The ECM (non-leasing) approach seems as though it would be a popular option. I guess a question that will arise is how to set-up a prop firm. Particularly, how to avoid paying the broker portion of commissions.
Thanks
Tony.

JEB211 said...

For Tony -

For an individual trader doing enough volume the best choice is to lease a seat. The ECM-W is the worst choice as it is a temporary program with the membership waiver expiring on 12/31/2010.

You cannot avoid the broker commissions as every member must trade through a clearing firm. A trader doing volume can get very favorable commissions from clearing firms.

JEB211 said...

Don,

For the vast majority of traders who do volume in ES leasing an IOM seat is the way to go. There are certain traders who should buy a seat and one of them is you.

A leasee pays $0.21 a side and a seat owner pays $0.095 a side for clearing or a savings of $0.115 a side for the seat owner.

Let's assume you do the same volume in 2010 as 2008. Owning a seat and doing 586,184 sides would save $67,411.16 a year plus foregone lease expenses.

Doing 4 times 2008 volume or 2,344,736 sides would save $269,644.64 a year plus foregone lease expenses.

AN IOM seat recently sold for $175,000. At 2008 volume levels the savings would pay for the seat in less than 3 years. At 4 times 2008 volume levels the savings would pay for the seat in 8 months.

Once the seat is paid for all that annual savings drops to the bottom line. And you can always sell the seat or lease it out if you stop trading.

MoreYummy said...

So the only cost after acquired a Lease or ECM is Clearing fee + commission to your broker?