Grain-Pit Traders Squeezed Out as CME Expands to Match ICE Hours

CME Group Inc., the world’s largest futures exchange, extended grain-trading hours today in response to the threat of competitors seeking a share of the electronic transactions that now dominate the market.

Access to the CME’s Chicago Board of Trade, which first offered corn futures in 1877, is rising to 21 hours a day from 17, a week after the 12-year-old IntercontinentalExchange Inc., or ICE, introduced a 22-hour session and its first-ever grain contracts. The Kansas City Board of Trade and Minneapolis Grain Exchange also start expanded hours today.

While CBOT corn, wheat and soybean trading rose more than 15 percent to 182.8 million contracts last year, 93 percent of the volume was electronic rather than through open outcry in its Chicago trading pits, exchange data show. That compares with 63 percent in 2007. ICE had sought to lure speculators by allowing transactions to continue when market-moving U.S. government crop reports are issued and CBOT markets were closed.

“The electronic platform is a big, giant liquidity pool that is sometimes an inch deep and other times a mile deep,” said Douglas Carper, the principal of Omaha, Nebraska-based DEC Capital Inc., a commodity trading adviser and hedge-fund consultant. “Grains will become more or less an institutional and professional market, just like it is already in stocks, foreign exchange and global bond markets.”

The Commodity Futures Trading Commission said May 18 CME could open markets from 5 p.m. to 2 p.m. Sunday to Friday, the first expansion of its Globex electronic exchange since January 2008. Hours for the CBOT pits in Chicago, where traders shout orders at each other and use hand signals, are unchanged at 9:30 a.m. to 1:15 p.m. Monday to Friday.

ICE Competes

Wheat futures advanced 1.2 percent to $7.035 a bushel at 11:02 a.m. on the CBOT, heading for the sixth straight gain and the longest rally since late January.

CME, led by Chairman Terrence Duffy and Chief Executive Officer Phupinder S. Gill, initially sought expanded trading after Atlanta-based ICE announced plans April 12 to compete directly with the Chicago grain markets. Trading in ICE’s corn futures was 595 contracts on May 17, compared with the CBOT’s 232,706 futures contracts, exchange data show.

More access to the CBOT, where holdings in the five biggest grain contracts were valued at $131 billion in March, will be appealing to big institutional investors who prefer the ease and liquidity of electronic markets, said Jeff Hainline of Advance Trading Inc. in Bloomington, Illinois. It may create more stress for independent pit traders, farmers and grain elevators who use CBOT markets to hedge price risks, he said.

Opportunity and Threat

“It’s an opportunity and a threat,” said Hainline, the president of the risk-management company for grain processors and farmers who’s been in the commercial grain business for 35 years. “People who survive will adapt. You have to be a cockroach and not a dinosaur.”

Trading now will be open during the release of most of the USDA’s supply and demand reports, which will increase volatility and decrease the ability of traders to make informed decisions, said DEC Capital’s Carper.

“I see only increased risk,” Carper said. “A lot of trading will be based on reactions rather than orderly decision making. It will cause too many people to make decisions in a millisecond without any thinking. That can only cause a lot of trouble from a risk management perspective.”

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 CBOT 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.

Reviewing Reports

The USDA’s National Agricultural Statistics Service and Agricultural Statistics Board are discussing the implications of extended trading, Hubert Hamer, the chairman of the Agricultural Statistics Board, said in an e-mail. Any change to the report release schedule “is complex, has far-reaching impacts, and would be made very deliberatively,” he said.

Longer hours probably will accelerate the shift to electronic trading as institutional buyers and sellers avoid small hedgers, retail traders and advisers, according to DEC Capital’s Carper.

Electronic trading of CBOT corn, soybean, soybean meal, soybean oil and wheat futures was 169.45 million contracts last year, more than double the 82.21 million that changed hands in 2007, exchange data show. During the same period, pit trading tumbled 73 percent to 13.3 million contracts.

Spread Liquidity

Longer exchange hours may spread liquidity too thin in grain markets accustomed to the bulk of the buyers and sellers operating during pit trading from 9:30 a.m. to 1:15 p.m., which may make futures less useful as hedging tools, said Jason Britt, the president of Central States Commodities Inc. in Kansas City, Missouri.

“Is it stretching the liquidity out over too many hours?” Britt said by telephone from his office at the Livestock Exchange Building in Kansas City. “It felt like a knee-jerk reaction to ICE instead of people’s need to do business for 22 hours.”

CFTC Commissioner Bart Chilton, in an e-mail on May 18, said he was a “reluctant supporter” of the longer trading hours. “We need to look more in-depth at how markets have morphed to guarantee that price discovery and risk management remain the uppermost of priorities,” he said.

Will Adapt

Scott Irwin, an agricultural economist at the University of Illinois at Urbana-Champaign, said he is “100 percent” confident traders will adapt to the expanded hours.

“It’s not like this doesn’t happen in other commodity markets like oil or in the financial or currency markets,” Irwin said. “It opens up the opportunity for greater participation in the market.”

The amount of electronic trading probably will increase as more people have access to the grain markets globally, meaning brokers who already work long hours will need to work more, said Britt of Central Commodities, who starts work before 6 a.m. and “sleeps with the computer right next to the bed.” In their quest to increase profits, exchanges need to remember their purpose, he said.

“As forecasts come out, or whenever there is a potential supply issue, it does mean that trade will be spread out across the day rather than being reflected at the open of the U.S. market,” said David Johnson, general manager of risk and pricing at Emerald Group Australia Pty. “It probably allows more volume to be traded during Australian hours.” The country is the world’s second-biggest wheat exporter.

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