So I am going to buy a seat in the near future. Makes sense for me transactions wise. I was just wondering what people think about the CBOT/CME seat prices over the next few years. At first glance they look undervalued historically to me but I don't have any conviction over what the future holds. Interested to hear what other people think.
Predicting the future value is very hard. You need to get enough value out of the lower cost structure offset by higher market data charges to make up for the risk of the investment and lower trading capital. You can always lease them and not tie up capital or have investment risk, but leased seats pay a little more in clearing cost. For me, if I were an active trader in an individual account, trading 1000 RT per month or more, when I compare the cost to lease, about $275/month vs $25,000 last sale, I'd rather buy the seat and not pay about 13% to lease and I would not care of the seat value if it were for 5 years or more.
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From my colleague: I used to manage our (trading firm's) 106H/106J/106S memberships across all 4 exchanges, so we had a big block of seats and voting shares. They're actually rather high at the current prices; the prices tend to correlate with upticks in market volatility because market makers end up doing more volume or becoming more profitable during those times and suddenly find themselves wanting exchange memberships that they previously didn't have. Of course, the past 2 years have been among the best days for that part of the industry. There's a fundamental reason for this: From years of observing the seat sale bulletins, there's a strong trend where the net buyers are electronic market makers or high volume quant trading firms, and the net sellers are trusts, professional traders, utility traders, or estates of traders who retired after their pit trading days. It's hard to buy a seat purely as an investment. For starters, the next best price levels can be as much as 20+% apart, so you're instantly down a large amount when your bid/ask gets traded through. Another issue is that CME has a corporate board that is significantly larger than its peers because it had to grandfather in rights of various trader-majority exchanges that it acquired, so they're always finding ways to devalue the voting class of the seat owners. Also keep in mind there's also a transfer fee. We only recommend buying them if you can, say, break even on the spread size of seat prices with your volume within 3 months.
Like Robert Morse/Lightspeed and Kathryn Wu/Databento have said, if it makes "cents" do it, but not for the uncertain appreciation aspect. Major corporations hedge currency risk, if they make additional profits guessing right all the better. But that is not their main objective. Shouldn't be yours as well - trading not seat flipping.
Price -- current or future-- is one aspect. Years ago I investigated, but passed, because if there is ever a major problem, with lawsuits, I think seat holders could be assessed. With lawsuits, both private & Gov't gone wild, not inconceivable that someday an exchange is held liable for billions. If you could get almost as good a rate without the seat liability, that would be my choice.
More: May not change for you, but once you own a seat, and thus member of an exchange, every time you open an account - brokerage, bank, etc. -- with any financial institution you will need to list the membership. At the very least, it will require extra paperwork. Sometimes, it may cause extra fees -- for instance, IB quote fees are lower for "non professional" traders, etc.
TradeStation as well charges higher fees. Think the exchange or some Reg authority requires them to do so. And from what I also understand once you go Pro it is a b!tch to reverse it later, if you sell seat but still trade.
I think many here are missing the point. The membership purchase is a long term investment that provides MUCH lower transactional costs. MUCH lower. To some, buying that membership for $25,000 can save them $25,000 to $50,000 per year or more in clearing and regulatory fees. If it does that, who cares what it is worth in 3 years or 10 years. Why does it matter if your market data charges are $100 to $400/month more from Pro-Data fees. The net is all that matters. When you open a new account at an FCM, you only have to provide your membership acronym. Not a big deal. If you are borderline as to if to buy or lease, then lease for 6 months. If the math no longer works or your strategy does not work, you have your out. This path is for those that not only want to run trading futures like a business, but have the volume and cash to make it work and have been consistently profitable to make the commitment.
What is your opine on this proposal that the CME may become it's own FCM? In your mind, how will this help them, and how may it hurt external FCMs?