Eurodollar futures were created in 1981 as a way to trade the expected interest rates paid on U.S. dollar deposits held in overseas banks. They were the first cash-settled futures, as opposed to contracts that involve delivery of an underlying asset such as oil or corn.
Even as Libor, the underlying interest rate, has been marked for retirement by global regulators, they remained the world’s most-traded interest-rate derivative as of last year, according to the Futures Industry Association, with average daily volume of about 2.7 million contracts in 2019. Options on eurodollar futures ranked fifth among interest rates derivatives.
The trades sent to the pit have names like butterflies and straddles and typically involve multiple contracts linked to the quarterly eurodollar futures that mature as far out as 10 years. They often involve selling one or more options contract to finance the purchase of others.
Because of the sheer number of possible combinations when every underlying futures contract, expiration month and strike price is taken into account, human market-makers shouting and flashing hand signals can work faster and at lower cost than robots, according to the humans.
Multi-Leg Trades
Kosanovich once brokered a trade that involved 16 legs, but he has seen as many as 24 legs quoted in one package price.
“It seems like it should be easy to trade these complicated multi-legged strategies, but it’s just not,” he says. Brokers’ “fiduciary responsibility as members is to get the best price for the end user,” he says.
Prior to March 13, the action in the eurodollar options pit justified its survival, according to CME’s own standard that at least 30% of average daily volume must be handled on a trading floor in order for the company to continue supporting an open-outcry pit. About half of the volume was handled in the pit before the shutdown.
Reopening the floor, however, will be tricky. The potential for social distancing is so impossible, it’s almost laughable.
That puts the CME Group in a tough spot. Executives at the exchange operator have said it’s their intention to reopen the floor three weeks after Illinois lifts its stay-at-home order. Market makers and floor brokers who want to return would do so at their own risk and have to sign a waiver.
When CME Group reported quarterly results in April, Chief Executive Officer Terry Duffy was asked by UBS analyst Alex Kramm whether the transition to fully electronic transactions had revealed floor trading to be unnecessary, allowing the company to save money by not restarting it. Duffy said the company intended to adhere to the 2000 guidelines requiring at least 30% of volume be handled on the floor to keep it going. He estimated the annual cost of operating the floors at $20 million, calling it “not extraordinary.” CME group earned $2.2 billion in 2019.