CME Takes Action to Curb Price Volatility in Cattle Futures

  • Chairman says he will be `very agressive' to implement changes
  • Cattle industry complained after volatility spiked in late `15

CME Group Inc., responding to criticism over price volatility in the cattle futures market, announced measures to help curb price swings while denying that high-frequency traders are to blame.

Cattle futures will be added to an existing CME system that caps how many order updates traders can send in relation to the number of trades they actually execute. The change starts Monday, Chairman Terry Duffy said at a conference organized by the National Cattlemen’s Beef Association in San Diego. The Chicago-based bourse, the world’s largest futures market, is also examining five-to-six-second trading delays that would act as circuit-breakers.

“I will be very aggressive to drive home change for cattle futures,” Duffy said Friday.

The curb on traders’ messaging was one of the steps the 28,000-member NCBA requested in a Jan. 13 letter to the exchange. Cattle futures price volatility at the end of last year soared to the highest in at least a decade. The NCBA says it suspects high-frequency traders, who use computer algorithms to execute deals measured in microseconds, are the cause of the elevated volatility, which it says undermines beef producers’ ability to use the futures market to protect against price swings.

Duffy told the conference the CME cattle contract is “potentially broke,” in that increasingly thin volumes are traded in the underlying cash market. He said 10 percent of cattle futures trading is accounted for by high-frequency traders, compared with about 50 percent across all trading on the CME.

October Trading

The bourse examined cattle trading in October and found that “aggressive” orders from non-high-frequency traders sparked big price moves, CME Chief Operating Officer Julie Holzrichter said at the conference.

“Our biggest concern is that intraday volatility -- when you see cattle contracts trade limit up or down without any change in fundamentals to drive that,” Colin Woodall, vice president of government affairs for the NCBA, said in an interview in San Diego Friday. “When the market goes limit either way, the market stops for that day, and waiting to the next day can cost a lot of money.”

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