The swoon in shares of the Chicago Mercantile Exchange ( CME) this week strikes some market participants as a harbinger of bad times for commodities trading. Whether a rough patch could be blamed on Refco ( RFX), however, is a matter of some debate. After touching a 52-week high of $346.50 on Oct. 4, the CME's stock has been steadily falling to a recent quote of about $311. Part of the decline is clearly attributable to perceptions about Refco, the big New York derivatives trader that is battling for survival amid a $400 million accounting scandal. The stock has lost more than 7% since word of Refco's travails broke on Monday. The Chicago Mercantile Exchange and the Chicago Board of Trade clear about 60% of all Refco trades. The CME says the figure for annual revenue received from Refco's business isn't available because the firm doesn't break out each clearing member's results individually. Yesterday, Refco imposed a 15-day moratorium on all activities of its offshore securities and foreign-exchange subsidiary, Refco Capital Markets Ltd. While the company said Thursday that capital accounts at its two regulated U.S. operations, Refco LLC and Refco Securities LLC, were unaffected by the scandal, on Friday it began to unwind customer and client positions at the latter. Traders said Refco Securities is the smaller of the two U.S. divisions, but Friday's move sowed more doubts about the parent's continued solvency. In a statement Thursday, the CME said Refco LLC has met all of its obligations and remains in good standing, but said it was restricting the company from withdrawing capital without the exchange's permission. Judging by the action in the stock, not everyone feels that it is business as usual at the Chicago Mercantile Exchange. Some traders even feel that the shuttering of Refco Capital Markets is a signal that the top is here for commodity prices.
"We have had a four-year run in commodities; the run is now over. Refco is a watershed," said one trader who spoke on condition of anonymity. "Oil continues to trade lower, copper is off its highs, and gold has sold off $13 with a declining dollar." Light, sweet crude for November delivery was recently down $1.33 to $61.75 a barrel. Gold for December delivery was recently off $4.10 to $467.20, its lowest level since Oct. 5. And copper for December delivery was down 1.4 cents to $1.751 a pound. The Philadelphia Gold and Silver Index ( XAU) was down 63 cents to $107.28, while the Amex Gold Bugs Index ( HUI) was off 59 cents to $230. Traders looking for reasons outside of the Refco scandal for the weakness don't have to look far. "The recent decline in commodity prices is purely Fed-related," said Tim Lobach, founder of Keystone Trading. "We have seen a great deal of momentum and speculation in commodities over the last few years, and the recent selloff has to do with rising interest rates. The FOMC has been working diligently to break the back of inflation." The FOMC has raised the overnight lending rate 11 times in a row to 3.75%. Lobach says no single company could cause a collapse of commodity prices and says the scandal of Refco has nothing to do with leveraged risk. He doubts the brokerage's travails are having much of an impact. "If the market should be worried about anything, it's the bankruptcy filing by Delphi ( DPHIQ)," said Lobach. One thing most traders agree on is that many Refco clients are looking for a new home. Refco has been uniquely positioned in the market by attracting the mid-size and smaller futures players while leaving bigger fish to the more established banks. Any big defection could create an opportunity for a competitor. A trader who did not want to be identified said that Refco's business is still a solid one and wouldn't be surprised if a major bank stepped in and bought the company once the scandal plays out.