Milling & Baking News - May 29, 2012 - 18

Business 

Expanded electronic trading brings headaches as well as opportunities
KANSAS CITY — The expansion of electronic trading hours implemented by the nation’s principal grain and oilseed futures exchanges on May 20-21 has provided grain-based foods more than a few headaches to go along with the intended increased hedging, pricediscovery and risk management opportunities. While industry opposition to the new trading regime was mollified by modifications to the exchanges’ initial proposal for the expanded electronic trading session, there remained several questions that begged for answers, including how elevators might best accommodate a later close to electronic trading when posting daily grain bids to producers, and whether allowing electronic trading to be open during the release of key statistical and economic reports issued by the U.S. Department of Agriculture will put some market participants at a disadvantage. The CME Group, the Kansas City Board of Trade and MGEX (formerly the Minneapolis Grain Exchange) at 5:00 p.m. Central time, Sunday, May 20, opened their grain and oilseed contracts for trading under the new 21-hour electronic trading format. Under the new system, electronic trading continues until 2:00 p.m. each trading day. After a three-hour pause, trading for the next day’s business begins at 5:00 p.m. In other words, a Tuesday electronic trading session begins at 5:00 p.m. on Monday afternoon and ends at 2:00 p.m. on Tuesday. Before the changeover, electronic trading for a Tuesday would have begun with an overnight session beginning at 6:00 p.m. on Monday evening that would halt at 7:15 a.m. Electronic trading then would resume at 9:30 a.m. and end at 1:15 p.m. on Tuesday afternoon. Pit trading of grain and oilseeds futures and options was unaffected by the expanded electronic trading hours with daily open-outcry sessions beginning at 9:30 a.m. C.T. and ending at 1:15 p.m. The exchanges initially sought a 22hour electronic trading session beginning at 6:00 p.m. the afternoon before and ending at 4:00 p.m. That proposal was opposed by industry groups such as the National Grain and Feed Association, the North American Export Grain Association and the North American Millers’ Association.
18 / May 29, 2012 Milling & Baking News

Among the industry’s concerns was the proposed 4:00 p.m. C.T. close to electronic trading would adversely affect back-office personnel as well as computer and accounting systems required to reconcile trading activity given different closing times for openoutcry and electronic trading. “If electronic trading remains open through the late afternoon or early evening, firms, especially those operating in the Eastern time zone, will be faced with putting on extra personnel and/or paying overtime work into the evening hours,” the groups said May

10 in a petition to the Commodity Futures Trading Commission. The exchanges’ willingness to adjust their proposed electronic trading session to 21 hours with a close at 2:00 p.m. seemed to address at least this concern, and the N.G.F.A. and NAEGA withdrew their petition seeking a comment period. The N.G.F.A. and NAEGA said they would continue to work with the CME Group and others to address concern about the release of key U.S.D.A. reports during electronic trading hours. Before the expansion of the electronic trading hours, daytime electronic and open-outcry trading did not begin until 9:30 a.m., two hours after the release of crop production, crop progress, grain stocks, planted acreage and other potentially market-moving U.S.D.A. reports. The N.G.F.A. and NAEGA noted there was concern from many market participants that the release of such U.S.D.A. reports during electronic trading hours may increase market volatility and put at a disadvantage some market participants because of unequal access to U.S.D.A. report data in a timely manner because of such factors as slower Internet bandwidth speeds in rural areas. Indications were the U.S.D.A. was considering its role in the matter, which would revolve around the time of day it releases its reports. Some suggested the U.S.D.A. should issue reports later in the morning hours when both electronic trading and open-outcry trading are under way, or delay release until after 2:00 p.m., when all trading is over for the day, at least until the resumption of

electronic trading at 5:00 p.m. There were voices who suggested should the U.S.D.A. not be willing or able to adjust its report release times, open-outcry trading should begin earlier in the morning, so pit traders didn’t find themselves at a disadvantage. Then there was the question of how producers, country elevators and grain merchants, and grain users and processors, should react to the different closing times for open-outcry and electronic trading. The exchanges said they would continue to post the daily contract settlement prices at the end of pit trading at 1:15 p.m. But electronic trading continues for 45 minutes after the end of open-outcry trading. “The new trading hours and settlement practices are creating confusion in the country, where most web sites are quote-system driven,” said Joe Christopher of Crossroads Commodities, Sidney, Neb. “When the quote system erases the 2:00 p.m. trade and shows a 1:15 p.m. settlement that may be different from the last trade, we have a credibility problem. The exchanges need to deal with this quickly.” Crossroads on its web site noted it will execute trades using the electronic platform’s 2:00 p.m. C.T. close to take advantage of the extended hours. Crossroads said it was working with its quote provider to eliminate this confusion and hoped its web site would be able to reflect the new longer trading hours as soon as possible. With change come growing pains, Jeffrey Borchardt, president and chief executive officer of the K.C.B.T., told Milling and Baking News about the debut of expanded electronic trading hours for the wheat futures markets. Mr. Borchardt said quote providers used by the K.C.B.T. and the other major grain exchanges may have to make adjustments in what prices they post so buyers and sellers are able to accurately calculate cash grain prices after the close of pit trading at 1:15 p.m. The K.C.B.T. has proposed to its quote provider, Chicago-based Barchart.com, Inc., that it begin showing the last trade of the electronic trading day as well as the settlement price of open-outcry trading. Mr. Borchardt said he had received a number of calls from cash-grain traders who were confused about which futures price to use in calculating prices, but he said he thought an adjustment to include a “last price” of the trading day would solve these problems. MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - May 29, 2012

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