IntercontinentalExchange Inc. (ICE), the second-largest U.S. futures market, is adding agricultural contracts to draw trading from speculators betting on price swings linked to changes in U.S. government crop estimates.
Corn, wheat, soybeans, soymeal and soyoil contracts start today on ICE, founded 12 years ago as an energy market. The Atlanta-based company is competing with CME Group Inc.’s 164-year-old Chicago Board of Trade, where holdings in the five biggest grain contracts were valued at $131 billion in March.
ICE contracts trade 22 hours a day, and the market will be open when the U.S. Department of Agriculture issues supply and demand reports normally published during a two-hour trading halt on the CBOT. Chicago-based CME, the largest U.S. futures exchange, plans to extend its hours to match ICE from May 21, seeking to protect its share of corn, soybean and wheat trading volumes that jumped more than 13 percent last year.
“The ICE exchange is going after speculators and hedge funds that want to trade increased volatility,” said Greg Grow, the director of agribusiness for Archer Financial Services Inc. in Chicago, who has been in the grain industry since 1979. “It’s a political move to beat the CME to expanded trading hours and trade during sensitive USDA reports.”
The price of corn, the biggest U.S. crop and the most-actively traded agricultural product, rose or fell by the maximum allowed on the Chicago Board of Trade 12 times in the past year, exchange data compiled by Bloomberg show. Eight of those occurred after government reports that were issued while trading on the exchange was halted, between 7:15 a.m. and 9:30 a.m. in Chicago, or from 1:15 p.m. to 6 p.m. Corn rose 0.3 percent to close at $5.83 today in Chicago.
In the most recent instance, the USDA issued its quarterly grain-stockpile estimate on March 30 at 8:30 a.m. in Washington. When trading resumed on the CBOT two hours later, prices surged by the exchange’s 40-cent limit, or 6.6 percent, to $6.44 a bushel, capping the biggest gain since June 30, 2010.
“Keeping the markets open during the release of critical USDA data will increase market volatility,” said Richard Feltes, the vice president of research for R.J. O’Brien & Associates in Chicago. “Now the advantage will swing to the market participants with the fastest computers to first get the data from the USDA and then place orders. People will be making snap judgments on data that we used to have time to analyze.”
The USDA’s monthly report on supply, demand and inventories ran to 40 pages on May 10, with hundreds of figures and dozens of tables on everything from corn and meat to cotton and dairy products. Because CBOT trading doesn’t open until two hours after the report and an over-the-counter swaps market offered limited access, grain traders often spend the time parsing the data to determine its potential impact on prices.
“It’s clear that the ICE exchange is looking to attract traders who want to get in and out of the markets quickly and not the commercial hedger,” said Tom Fritz, a vice president at the EFG Group LLC in Chicago and a third-generation trader who started in the CBOT open-outcry pits in 1969. “So far I don’t see it threatening the CBOT, but further monitoring is required.”
Electronic trading began at 5 p.m. yesterday on ICE Futures U.S. As of 1:15 p.m. today, 405 of the ICE’s July corn futures traded, compared with 94,852 contracts traded electronically on the CBOT, exchange data show. Starsupply Renewables said it was the broker for the first block trade in the ICE grain futures. A block trade is a noncompetitive, privately negotiated transaction that is executed away from the electronic markets. ICE offers them in all grain futures.
There were 264 of ICE’s July soybean contracts traded, compared with 141,133 of the July futures in Chicago. An estimated 33 wheat contracts traded on ICE, compared with 35,573 CBOT July futures. There were 23 July soybean-meal futures and 24 July soybean-oil futures, exchange data show.
The two largest U.S. grain-handling organizations said in a May 10 statement that expanded trading hours “raise serious issues that could lead to competitive inequalities and impose significant additional costs” related to personnel and changes in computer technology and accounting systems.
While the National Grain and Feed Association and the North American Export Grain Association said they don’t oppose “some reasonable and properly structured expansion” of trading hours, the groups urged the Commodity Futures Trading Commission to delay the moves to allow for further review.
IntercontinentalExchange founder and Chief Executive Officer Jeffrey C. Sprecher told analysts during an earnings conference call on May 2 that the company was “inundated by customers” that asked ICE to add grains to its markets. The company already has energy and agricultural commodities, which include sugar, cotton, coffee, cocoa and orange juice.
“We just see more and more large agribusiness firms that are dissatisfied with the current offerings,” he said. “Even given the difficulty of competing with incumbents in this space, particularly good incumbents, we really feel that there is an opportunity here.”
Sprecher noted the growth of ICE’s contracts for U.S. gasoline and heating oil, which mirror the CME’s New York Mercantile Exchange contracts and now have about 10 percent of the market. “Because of the low cost of introducing contracts, that’s all highly, marginally efficient revenue,” he said.
The CME has responded with a plan to expand trading hours to 22 from 17. The exchange will shut only from 4 p.m. to 6 p.m., which means it will be open when most USDA reports are issued.
“We take all competition seriously and remain focused on providing the deepest, most-liquid and efficient markets for our grains customers,” Tim Andriesen, the CME’s managing director, agricultural commodities and alternative investments, said in a written response to questions from Bloomberg. “We’ve been working with the grain industry to provide risk-management products for 135 years and continue to be an innovator today. CME Group is the best marketplace for customers to execute and manage their grain price risk.”
The five new ICE contracts will be cash settled rather than provide the option of delivering the commodity, the exchange said on its website. Settlements will be determined by the closing prices of the CME contracts the day before the start of physical delivery in the Chicago futures. Contract sizes will be identical to those on the CBOT, with lower margin deposits required for speculators, ICE said.
The initial performance bond for opening a long or short speculative position in corn on the ICE exchange was set at $1,980 below the current $2,363 margin for the most-active futures in Chicago. Hedger margins were set at $1,800 compared with $1,750 on the CBOT. Similar speculative margin advantages were set for soybeans, wheat and soybean oil.
“The day-trading community may be their biggest constituency, but grain merchants will take a cautious approach to the new products, especially since they’re cash settled,” Peter Meyer, senior director agricultural commodities at PIRA Energy Group in New York. “The reduced margin costs are only applicable once liquidity is established at ICE, which will take quite some time.”
Traders may be reluctant to switch from the CBOT, where trading in corn, soybeans and wheat rose to 148.4 million contracts last year from 129.9 million in 2010, exchange data show. The top five grain and oilseed futures had combined open interest, or contracts that have yet to be delivered, of almost 3.2 million in March, according to a CME report.
“I have the capability to trade on the ICE, but a lot of my grain elevators and other commercial clients will stay with the Chicago futures,” EFG Group’s Fritz said. “I don’t think the new contracts will gain much market share.”
In 2006, CME attempted to grab market share in trading of sugar, coffee, cocoa, cotton and orange-juice futures by introducing contracts to compete with the established ones on the New York Board of Trade, which ICE acquired in 2007.
Open interest in CME’s raw-sugar futures was 26 contracts as of May 9, compared with 723,240 for the ICE sugar contract, data from the exchanges show.
ICE began offering futures for Canadian milling wheat, durum and barley on Jan. 23. Combined open interest in the two ICE Futures Canada wheat markets was 140 contracts on May 9 compared with 37,852 futures open in the spring-wheat futures traded at the Minneapolis Grain Exchange.
“History would suggest that the success of new futures contracts is limited when they must compete against existing franchise contracts,” said R.J. O’Brien’s Feltes, a grain analyst since 1973. “The new grain contracts will face an uphill battle to get established.”
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