June 15, 2009 

Mr. Tony Saldukas 

CFTC 

525 W. Monroe Street, Suite 1100 

Chicago, Illinois 60661 

Dear Mr. Saldukas: 

I am sending the attached letter to you which addresses the Chicago Mercantile Exchange's recent rule 

changes to allow firms to "cross" trades on the Exchange without having to go through the normal price 

discovery process. While the Staff at the CME feels that allowing these trades is critical to the success of 

their business model, most of the traders who make markets in these products feel that it will hurt the 

Exchange's position if such anti-competitive measures continue to be promoted. My hope is that by 

sending this letter out to various people such as you, who have an interest in the Exchange's continued 

success, that someone might be as outraged as the general trading population is at the CME's policy and 

their attempts to gain volume by going against their claim of being a "fair and transparent" marketplace. 

I would appreciate any feedback regarding this subject that you may have. I can be reached at 312-244-

5642 or bye-mail atjames.rowoldt@ronin-capital.com. Thank you for your time. 

SinCe~J~ m nn ~&­

JameU~l~tWJ Ronin Capital, LLC 

Enclosure: Letter and Petition to Amend Block Trading Rules 

JR/jas 

Administration 1230 S. LaSalle Street, Suite 400 1 Chicago, IL 60604-1407 1 Voice: 312.244.50001 Fax: 312.244.5201 1 www.ronin-capital.com 
.' 

CAPITAL LLC 

June 15,2009 

VIA MESSENGER 

Mr. Bryan Durkin 

Office of the President and COO 

CME Group, Inc. 

550 W. Washington, Floor 13 

Chicago, Illinois 60661 

RE: FINANCIAL OPTIONS BLOCK TRADING ACTNITY 

Dear Bryan: 

After discussing with members of your Staff the recent block trading activity in the Financial Options, I 

am still not comfortable that the Exchange is ready to meaningfully consider opposing views regarding 

the propriety of the block trading rule as it is currently enforced. The purpose of this letter is to ask that a 

dialogue be opened between the Exchange staff and other interested parties in order to come up with a 

reasonable solution to a rule that is currently being exploited by some members of the Exchange to 

promote non-competitive business practices. 

As has been described to me by your Staff, there seems to be a group of large customers who currently do 

not use the Exchange as much as they could due to their inability, as they claim, to get an adequate market 

on either the screen or the floor. This being the case, they argue that if they could negotiate a trade 

outside of the normal market mechanisms (I believe you call it the "central order book"), they could find 

another party to facilitate their need to trade a large amount of contracts at once. Based on this input from 

the handful of customers who in the past have probably performed their transactions in the OTe 

marketplace where the rules of transparency have traditionally been more lax than that of the CME, the 

Exchange has decided to change the rules of fair play that have stood basically intact for decades in order 

to facilitate what they think could be a substantial source of new revenue. A common argument I've 

heard from your people is that if the CME doesn't allow these bigger customers to do what they want, 

another Exchange such as the ICE will accommodate them. 

The adverse effects of the CME's hasty policy change are already being felt by the majority of those 

trading these products. Since my primary field of expertise (for lack of a better word) is in the Financial 

Options, I can only personally speak of the few trades that have occurred in those products; but, through 

talking with several futures traders regarding the blocks in their products, I feel that their circumstances 

are similar to ours. Basically, it appears that the customers who are using the block trade functionality are 

doing so simply to direct business to a preferred counterparty. There's no other reason why a customer 

would choose to lose several hundreds of thousands of dollars on an execution in order to circumvent the 

deep liquidity pool that is found in both the pit and the electronic platforms. In the few trades we've seen 

thus far, the trades were executed so far away from the prevailing bid and offer that it allowed the 

counterparty to the customer's trade to tum around and immediately lock in a substantial profit on the 

floor by simply trading with their peers who didn't have access to the inside information. If the trade 

would have been quoted in the pit or on the screen the customer would have been the beneficiary of the 

better price that was routinely received by the counterparty. Your Staff's contention that a customer can't 

execute the size necessary by going through the normal price discovery process is insulting to the traders 

and groups who routinely trade similar sizes but are still governed by what you seem to think are outdated 

Exchange rules which were put into place to ensure a fair marketplace. 

Administration 1230 S. LaSalle Street. Suite 400 1 Chicago. IL 60604-14071 Voice: 312.244.50001 Fax: 312.244.5201 1 www.ronln-capltal.com 
Page: 2 

Again, without getting into a more in depth business analysis of the policy, what do you think is going to 

happen if you continue to be bullied by the bigger customers who simply want to use the Exchange's 

Clearing House because they have been mandated to do so? If you allow these firms to cross trades in 

I this manner without any regard to the current market, why would someone working for a trading group 

such as ours continue to make liquid markets knowing that at any given time something might trade 

significantly through my bid or offer without my knowledge? Let me make this point clear, the primary 

strength of the CME is in the liquidity pool it provides in its various contracts. If you continue to allow 

firms to engage in dubious practices such as block trading without modifYing the rules to make the 

transaction open to the entire marketplace, you are going to get rid of the liquidity providers that are 

essential to a contract's success. The volume growth the Exchange has enjoyed over the last several years 

has been directly related to their willingness to place their futures products on the screen allowing for a 

wider range of strategies to be employed by a new group of technology driven firms who found ways to 

make money through high frequency trading. In order for these strategies to work, however, the price 

discovery process has to be transparent and centralized so that these programs can use the information 

stored in the order book to ascertain the true value of a product and apply strategies accordingly. By 

creating a "shadow market" through the use of block/cross trades, the Exchange risks losing this 

substantial source of revenue as it becomes almost impossible to apply strategies based on tight bid/offer 

spreads when no one knows what the true market is due to the allowance of transactions away from the 

central order book. 

Bryan, I don't want to give the impression that block trading does not have its place in our current trading 

environment if implemented in a way that gives access to the entire market. As stated earlier, the Staff of 

the Exchange has gone forward with these policies based on feedback from large customers who want 

their trades to be executed immediately at one price. If it were me trying to facilitate the customer's 

request, I would make the assumption that the "one price" stipulation did not mean "any price". Almost 

all of the participants in this industry are professionals and have a fiduciary responsibility to make sure 

that they are receiving the best prices on their executions. I find it hard to believe the Staff's argument 

that some of their bigger customers would prefer to execute a trade with a single counterparty at a price 

substantially worse than they could have gotten through the traditional floor route. I would guess that 

some of the intermediaries involved in these trades have a vested interest in directing a trade off floor. 

The Exchange shouldn't continue to be complicit in these types of transactions simply because they 

produce higher margins for the Exchange. At the end of the day it is still in everyone's best interest to 

provide a fair, open marketplace. By letting some of the bigger players get away with what has 

historically been looked upon as anti-competitive practices, the Exchange truly makes itself susceptible to 

competition from outside Exchanges as the CME threatens to lose their core strength of being able to 

provide significant liquidity. In the past, we have fended off threats on our products from other 

Exchanges by simply being able to provide tighter, more liquid markets. Our group has been asked to 

participate as a market maker in many of these competing products opened by upstart Exchanges but have 

declined because there is simply no way to get out of a trade once you get in. The CME is currently in an 

enviable position to build upon an already significant market base by promoting their products as being 

the most liquid in the world. I would hate to see them lose that position because they are trying to defend 

threats from other Exchanges trying to "copy" the CME's main contracts. The only way that these 

Exchanges will be a threat is if the CME continues to go backwards and promote trading practices that 

were a product of a bygone era. 

Finally Bryan, given your history as a former regulator at the CBOT, let me make one more appeal to you 

based on the current CME rulebook. Realizing the rules have been changed recently to facilitate those 

trying to employ non-competitive practices, I hope the rule that I have taken from the CME's website is 

current. The rule governing block trading (Chapter 5, Section 525, paragraph D of the CME rulebook) 

states that the price in which a block trade is executed must be, among other factors, "fair and reasonable 

in light of the circumstances of the markets". Such vague language has thus far allowed the Exchange to 

avoid scrutiny by the CFTC since there supposedly is a price that could fall outside these parameters and 

Administration I 230 S. LaSalle Street, Suite 400 I Chicago, IL 60604·1407 I Voice: 312.244.5000 I Fax: 312.244.5201 I www.ronin-capltal.com 
.' 

Page: 3 

be disallowed by the Exchange. In practice, however, it appears as though there is a wide disparity 

between regulators at the CME and the majority of the Exchange's members over what constitutes a "fair 

and reasonable" price. If you were to ask the membership to consider the propriety of the last several 

block trades in the Financial Options in relation to the current rule, I would defy you to find anyone other 

than the party involved in the trades who would consider the trades either fair or reasonable. In the past, 

we have had rather clearly defined rules governing transactions on the Exchange and have required there 

be an audit trail throughout the trade execution process. With the new rules in effect and the manner in 

which they are being enforced by the CME's Regulatory Staff, is there any tactic that could be employed 

by an Exchange's customer that would be considered an actionable offense? If so, if you allow these 

deals to be struck outside of the normal market structure, how are you going to regulate possible rules 

violations if there is no audit trail to follow? Given the wide disparity in opinion between the Exchange 

and its members, isn't the policy as it currently stands worth taking another look at to see if there are 

ways to make the rules more palatable to all parties involved? 

Unless there are changes made to the current rules to ensure the transparency of the various cross/block 

trades, I think you are doing a disservice to all parties as the process of price discovery is totally 

undermined by the allowance of these "back room" deals. I believe that there is a solution here that will 

benefit everyone and allow the Exchange to gain market share at the same time. In fact, the CME has 

gone through great lengths to strengthen its electronic trading platform (EOS) to allow customers to enter 

a Request for Cross order which is conceptually no different than a block trade except that the RFC 

functionality allows for any interested party to participate in the process by being able to see the market 

request. While this may not be the ultimate solution to resolve the issue, the point here is that the CME 

currently has the technology to facilitate block trading in a fair manner, someone just has to take the first 

step and realize that the current system is flawed. Thank you for your time. 

Sincerely, 

J~~ 10Jw-tAatRonin Capital, LLC 

P. S. This letter has been circulated across the floor membership and is broadly supported by the 115 

liquidity providers to whom we circulated the letter, as reflected on the enclosed Petition Signature 

Forms. 

cc: Ms. Julie Holzrichter, Managing Director of Global Operations, CME Group, Inc. 

Enclosure: Petition to Amend Block Trading Rules 

JRljas 

Administration 1230 S. LaSalle Street, Suile 400 1 Chicago, IL 60604-14071 Voice: 312.244.50001 Fax: 312.244.52011 www.ronin-capllal.com 
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From: 

Sent: 

To: 

Subject: 

here they are. 

j34padr@aol.com 

Monday, June 15, 2009 1:16 PM 

John Hiatt 

Fwd: SIGNATURES FOR LEITER TO CME ON BLOCK TRADING 

-----Or:\.ginalMeasage-----

From: Gary sagui <gsagui@templartrading.com> 

To: Jim Dore (Jim Dore) <j34padr@aol.eom> 

Ce: Bob Dickey (Bob Dickey) <bdickey@templartrading.com>; Brian Avery <boaves@aol.com>; 

dwagstaff23@gmail.com; don vlheeler (don wheeler) <bigdwheel@hotmail.com>; ERIK KELLOGG 

<ekellogg®templartrading.com>; Jiglets@aol.com; gary knight (gary knight) 

<grknight@ameritech.net> 

Sent: Mon, 15 Jun 2009 13:03:22 -0500 

Subject: SIGNATURES FOR LETTER TO CME ON BLOCK TRADING 

Jim, 

The following people are full time traders on the CME electronic platform and have 

authorized me to contribute their signatures for the letter to the CME on Block Trading. 

Gary Sagui , Former CBOT director 

Bob Dickey 

Brian Avery 

Mark Jiganti 

Don Wheeler Jr. 

Gary Knight 

Dan Wagstaff 

Erik Kellogg 

Thank you, 

Gary Sagui