Five Year Futures ContractOverview

• First-in-first-out (FIFO) vs. Pro Rata Algorithm

• Pros and Cons of Each Methodology

Where Pro Rata Algorithm makes sense

• Low Volatility markets

• Constricted ranges

• Where market participation is inhibited

Where FIFO Makes Sense

• Markets with sufficient daily ranges

• Where volatility creates dynamic price action

• Where market users have opportunity to participate

Impact to GHCO FITE Traders• Less ability to scratch FV trades• Effect is magnified when the market slows• Fewer FITE trading opportunities due to less back

and forth trade in the at market price• Spread scalping is more difficult and less

desirable. The art of spread scalping is predicated on the ease of trading the individual legs of the spread

• A missed fill in FIFO markets creates opportunity when the market trades back to that price. Pro rata markets offer no such opportunity

Ladder Representation

Impact to CBOT Markets

• Pro Rata algorithm does not effectively allow for transfer of risk or efficient price discovery when markets are busy

• Pro Rata algorithm does not reward market participation

• Pro Rata algorithm limits liquidity, particularly when markets are volatile and liquidity is most needed

FIFO vs. Pro Rata

• FIFO rewards speed and precision• Pro Rata algorithm rewards laggards to the

market• FIFO better rewards traders that are willing

to assume risk, and thereby create liquidity. • The CBOT should encourage and reward

traders for their timely market participation and contribution to efficient, liquid markets.

GH FV Volume pre and post 7/2

• Average daily volume FV 2006 = 54,545

• Average daily volume FV post 7/2/06 = 26,599

• Percent Change in FV Daily Volume = -34%

• Average TY to FV ratio 2006 = 1.93

• Average TY to FV ratio post 7/2/06 = 2.34

• Change in TY to FV = -41%

• Percent Change in FV Volume for June vs. July Employment = -43%

Competitive Landscape

• Who does this benefit?• What are the costs to liquidity and efficient price discovery? • Bund-Bobl spread, a direct competitor to CBOT for trader

participation, will benefit• Other FIFO product spreads will also benefit as traders shift their

focus to FIFO• Why leave the door open to Eurex or other exchanges competing for

the attention of liquidity providers? • Our traders are migrating to CME products because of this change• If CBOT is committed to an algorithm rather than a FIFO market in

certain products, the exchange must make their algorithm a fair as possible, as soon as possible, or risk losing liquidity

Conclusions

• GH FV volume is severely impacted by pro rata• GH is not unique in how we trade the FV and the

FITE • GH is moving away from active FV trade• TY to FV ratio is growing• CBOT markets will become less liquid and less

orderly, particularly when markets are active• CBOT overall volume will be negatively impacted• BOT stock price will fall on decreased volume