CME commits to new hours, NCBA says industry might need more changes to lessen cattle market volatility
Feb. 10 the Chicago Mercantile Exchange officially committed to a change in the hours that beef cattle will be traded on the futures market.
National Cattlemen’s Beef Association Vice President of Government Affairs, Colin Woodall, said the action came in response to a letter his organization sent the CME last month urging policy changes to address market volatility the last several months.
While his organization appreciates the gesture and the CME’s willingness to work with them, updated trading hours was not something the NCBA requested, nor is it something they necessarily think will help curb volatility. By mitigating volatility, Woodall said, NCBA hopes to “level the playing field for everyone to use the futures market as a risk management tool.” Some of their members have reported avoiding making use of the futures markets due to the unsteadiness of the markets.
According to Bloomberg, the CME announced Feb. 10, 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.
R-CALF CEO Bill Bullard agrees that shortened trading hours will do little to even out the spikes and dips in the futures market. “The CME’s … proposal to shorten trading hours, attempts to address only the broken market’s symptoms, while completely ignoring the fact that the fundamental problem is that we have a broken cattle market,” he said. The unexpected and extreme price drop throughout 2015 was not caused by the volatility in the futures market, but instead was accompanied by it.
“The 2015 cattle price collapse defied all known competitive market forces that cause cattle prices to rise when cattle supplies are tight and beef demand is strong. In addition, retail beef prices remained inexplicably high long after cattle prices crashed.” Bullard added that, while fed cattle prices dropped $500 per head in 2015, “someone” made a financial windfall “and it wasn’t the producer.”
Some members of the NCBA Marketing Committee, the authors of January’s letter asking for five key actions by CME, have created a working group that also includes representatives from the CME. The working group plans to meet in Chicago sometime soon to discuss further action needed to lessen market volatility, Woodall said. NCBA has not necessarily said “yay” or “nay” to the commitment to change trading hours because they have not had the chance to sit down with CME folks to learn how the change is expected to reduce market volatility.
The NCBA’s Marketing Committee said high frequency trading, a relatively new activity on the CME, caused radical market swings over the last year.
“High frequency trading occurs at a rate faster than any human can analyze,” said the letter, signed by committee chairman Ed Greiman. They called for a one-second delay between trade actions in order to level the playing field so that everyone sees the market at the same speed.
“In order to better analyze and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilized by industry and researchers to better understand trading behavior which could possibly be damaging,” said Greiman and NCBA’s president Philip Ellis, in the CME Group letter.
“High frequency traders,” according to Forbes magazine, use computers to “try to profit from the price movements caused by large institutional trades.” The magazine article goes on to explain, “HFTs buy on the dip, hoping to be able to sell the shares a few minutes later at the normal price,” saying the activity is secretive and mysterious but not “evil,” and that it can serve to level out the bumps and dips in the market.
But R-CALF said directing attention at trading activity just avoids the true market problems, including a cash market on fed cattle that is too thin to establish a fair market price. “About 80 percent of national procurement and about 97 percent of procurement in the southern plains is through non-cash arrangements,” he said.
Too few traders who actually own cattle is another problem with the market, Bullard said. “The vast majority of traders have no connection to the underlying commodity. With so many speculators, volatility is inevitable and is reigned in to some extent by the cash market. However, as the cash market fails its price-discovery function, its ability to reign-in futures market volatility likewise fails. This is what happened in 2015 – the failure in the futures market manifested by volatility followed the collapse in the cash market caused by price manipulation.”
Bullard added that with the recent repeal of country of origin labeling, the U.S. beef industry “cannot sustain a cattle cycle” when beef can be imported from Brazil, Argentina, Mexico and Canada, as soon as domestic supplies start to tighten and prices start to climb.
The letter the NCBA sent to CME Group can be found online at http://www.beefusa.org/CMDocs/BeefUSA/Media/NCBAlettertoCMEreHFT.pdf.
The NCBA’s Marketing Committee listed the following five requests in their Jan 13 letter to Mr. Terrence A. Duffy, Executive Chairman & President, CME Group
1. Livestock contracts must be monitored, measured, and controlled through the CME Globex Messaging Efficiency Program. Grain, currency, and index contracts have limits regarding messaging. Livestock contracts must have the same.
2. A one second latency or delay between trade actions (cancel, cancel/replace, etc.) is imperative to make automatic trading work. Implementing latency will make messaging much more difficult as there will be greater risk of order execution. High frequency trading occurs at a rate faster than any human can analyze. Latency would therefore level the playing field so that everyone sees the market at the same speed.
3.The CME Group has to be more proactive regarding spoofing. Identifying spoofing concerns and bringing them to light, rather than waiting until they are reported, would go a long way in showing stakeholders your commitment to addressing this issue.
4.In order to better analyze and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilized by industry and researchers to better understand trading behavior which could possibly be damaging. Release of the previous year’s data each month should be acceptable in providing researchers with adequate information while also protecting the confidentiality of traders.
5. As a self-regulated organization, CME Group has the responsibility of regulating and policing any misuse of futures contracts. There are concerns that the CME Group bases most of its investigations from tips or concerns brought forth from those who use the contracts. The CME Group has to actively engage in monitoring and acting upon violations or market manipulation. More importantly, CME Group should be vocal in reporting these actions to stakeholders.
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