CME Says Cattle Market May Be ‘Broken’ as Volatility Soarsby
Chairman says he'll be `very aggressive' to implement changes
Cattle industry complained after volatility spiked in late `15
CME Group Inc., the world’s largest futures market, moved to curb a recent jump in price volatility in U.S. cattle futures while warning that the derivatives may be “broken” because of changes in the livestock industry.
Starting Monday, cattle futures will be added to a CME system that caps how many electronic order updates traders can send in relation to the number of trades they actually execute. CME Chairman Terry Duffysaid he’d also push for shorter hours and trading delays to help curb volatility.
Speaking Jan. 29 at a conference held by the National Cattlemen’s Beef Association in San Diego, Duffy denied that high-frequency traders were to blame for the volatility. While the NCBA wrote a letter to the CME last month linking high-frequency trading to volatility, some of its members see another cause: the slumping volume in the underlying cash market where cattle change hands directly between owners and meatpackers.
“Futures, a derivative thereof, need to have a viable cash market, so if it doesn’t, it might be broken,” Duffy said in an interview.
The volatility has meant cattle futures traded in Chicago have increasingly hit daily trade limits for upward and downward prices moves. That’s spooked cattle owners and deterred them from using the derivatives to protect against price swings, the 28,000-member NCBA said in its Jan. 13 letter.
“You’re scared to buy, you don’t want to sell, it paralyzes you," said Ed Greiman, the chair of the NCBA’s marketing and international trade committee.
Volumes in the cash market have been falling for decades as cattle owners increasingly agree to sales contracts based on price formulas. These are often more efficient, resulting in a $25-per-head value for sellers, according to Stephen Koontz, an economist at Colorado State University. In some instances trade has effectively dropped to zero in some southern states, he wrote in research published last year.
When there’s a lack of price indicators from negotiated cattle trades, futures prices can’t be based on supply and demand fundamentals, Greiman said in an interview last week. He said that may have added to the spike in recent volatility.
Duffy downplayed the influence of high-frequency traders, telling the conference that they account for just 10 percent of cattle-futures trading, compared with about half of all the derivatives volume on the CME. The bourse hasn’t gotten complaints about volatility or high-frequency trading from other agricultural commodity groups such as pork and grain producers, Duffy said in the interview.
Still, the bourse is adding cattle, feed-cattle and lean-hog futures to its trader messaging system.
“I will be very aggressive to drive home change for cattle futures,” Duffy said.
In an attempt to expand cash-market trading, Greiman’s committee is working on developing an online auction for feed yards and meatpacking companies. A mock-up auction was conducted recently, Greiman said.
The NCBA is also forming a working group that will include representatives from the CME to drive more action and continue to address the volatility in futures, Colin Woodall, vice president of government affairs for the NCBA, said in an interview Friday.
“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,” he said. “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.”