Stampeding Cattle Volatility Spurs Cut in CME Futures Hours

  • Working group set to enhance `market quality,' exchange says
  • High-frequency trading caused price swings, beef producers say

CME Group Inc. is reducing trading hours for livestock futures, the latest measure taken by the Chicago-based exchange in response to beef producers who say there is too much volatility and undue influence from high-frequency traders.

A working group will be formed with the National Cattlemen’s Beef Association to examine more changes in trading, including setting up so-called circuit breakers to pause the market, CME Group, the owner of the world’s largest futures market, said Wednesday in a statement. The change in hours was “based on customer requests,” the company said.

CME Chairman Terry Duffy said at a cattle industry conference in January that he would push for changes in livestock markets to curb volatility that beef producers say make it harder to hedge their financial risk effectively. Last month, the National Cattlemen’s Beef Association said that high-frequency trading and wide price swings made futures “more of a liability than a benefit.”

“Nothing is more important to us than the integrity of our markets, which help farmers and ranchers to discover prices and transfer risk,” Tim Andriesen, CME Group managing director of agricultural products, said Wednesday in the statement. “We believe these actions will further enhance our cattle markets for all participants.”

New Hours

Effective Feb. 29, futures and options in cattle, hogs and feeder cattle on CME Globex will trade from 8:30 a.m. to 1:05 p.m. Chicago time from Monday to Friday, pending approval from regulators. Options trading by open outcry will be from 8:30 a.m. to 1:02 p.m. On most days currently, electronic trading runs from 8 a.m. to 4 p.m.

In December, a measure of volatility in cattle futures soared to the highest since 2004 while prices increasingly reached daily trading limits. That deterred cattle owners from using the derivatives to protect against price swings, the 28,000-member beef association said in a letter to the exchange on Jan. 13.

CME Group said its data show that traders not using high-frequency techniques have triggered wide price swings. Duffy said the cattle market may be “broken” because transactions have slumped in cash markets, a benchmark for futures.

High-frequency trading accounted for 10 percent of average daily volume in cattle in 2015, CME Group said at the January industry conference. On Feb. 1, the exchange added livestock futures to a program that caps how many electronic order updates that traders can send in relation to the trades they make.

Daily Settlement

The daily settlement period and procedures for livestock haven’t changed, CME Group said. The company in February will review with customers whether a price discount is warranted for cattle delivery against futures at Worthing, South Dakota.

On Wednesday, cattle futures for April delivery rose 0.5 percent to settle at $1.318 a pound. The price fell in the previous four sessions.

This year, cattle have dropped 3.7 percent. In 2015, the price tumbled 16 percent, the most since 1981. Futures rose in the previous six years, a record rally.

Feeder-cattle futures for March settlement climbed 1.5 percent to $1.51225 a pound.

Hog futures for April settlement fell 1.8 percent to 68.35 cents a pound, the largest drop for a most-active contract in a week.

Before it's here, it's on the Bloomberg Terminal.