Milling & Baking News - October 30, 2012 - 14

Business 

Traders see beneﬁts, have concerns about K.C.B.T. sale
KANSAS CITY — Commercial users and members of the Kansas City Board of Trade see potential beneﬁts in the sale of the exchange to the CME Group, but they also have concerns as the transaction progresses toward completion. Joe Christopher, Crossroads Cooperative Association, Sidney, Neb., said he thought it was important to maintain the integrity and autonomy of the hard winter wheat contract. “As long as the contract stays the same and we don’t take the attitude that once we change something related to the Chicago contract (soft red winter) we necessarily must make the same change to the hard winter wheat contract, it probably won’t make a lot of difference for us,” Mr. Christopher said. Greg F. Edelblute, vice-president, grain, Cereal Food Processors, Inc., and a past K.C.B.T. chairman, echoed similar ideas. “I’m not sure I see a short-term real change,” Mr. Edelblute said. “We have now a real reason for this to happen — as trading evolves from open outcry to electronic. Most people won’t see something different.” The shift in recent years to electronic trading on the CME Group’s Globex platform by the K.C.B.T. and the Minneapolis Grain Exchange (MGEX) was in part predicated by the need to boost volume as open outcry trading in the “pit” declined, but the decline hastened after the move to Globex. There were days in the past few months when pit trading at the K.C.B.T. was zero, while electronic trading was near record highs. “Open outcry lasted a lot longer than some expected,” Mr. Edelblute said. “It probably made the wheat market function a little better.” He noted the number of independent ﬂoor traders (locals) has been declining, just as open outcry volume has been. Some independent traders have retired, and some trade electronically from an ofﬁce or even from home. In some functions a human trade may have an advantage, but there is “a lot of good” in electronic trading, he said. “There is probably greater volume of trading between computers now than between traders,” Mr. Edelblute said. “We certainly have greater liquidity and greater volume in contracts today.” He didn’t foresee a signiﬁcant number of company ofﬁces closing as a result of the change, since it won’t be much different from the current electronic trading arrangement that has been evolving for some time. Cereal Food’s ofﬁces are located in a different part of the Kansas City metro area, not at the K.C.B.T. “For the past year or two there has been no ﬂour miller at the (K.C.) Board of Trade,” Mr. Edelblute said. “There’s less need to be in the physical presence of other people with electronic trading.” Although Cereal Foods has been a longtime clearing member on the K.C.B.T., once ownership changes, the company will do business as a customer of an FCM since it does not have a seat on the CME Group. He said he anticipated trading “will cost a little more in transaction fees” under the new system. “The value of membership was a great thing,” he said, “but the reason Cereal Foods holds membership is for doing our daily business.” Mr. Edelblute noted that one of the positives of the K.C.B.T. was that it was run with members on committees directing changes in the wheat contract. “The Kansas City group always has been very responsive to commercials, perhaps more responsive to the trade than to the big money groups,” Mr. Christopher said. “They’ve taken the time to go out and speak with people and have been deliberative in their approach to change. You could always speak with someone, always get your questions answered. I hope we don’t lose that.” On a related note, Mr. Christopher expressed concern about responsiveness to the grain and milling trade, indicating the Chicago Board of Trade seemed to be more responsive before it became a public company, i.e. part of the CME Group. Because of the larger market overall in Chicago, and the relationship to other grains, there is probably a beneﬁt for the hard winter wheat contract, Mr. Edelblute said, noting he expected improvements in volume and liquidity in the contract and especially in wheat options trading. “With the contract under CME ownership, they may have incentive to promote the contract to its fullest,” Mr. Edelblute said. “I’m personally sorry to see it change into different ownership,” Mr. Edelblute said. “But it’s the way of the times, and it was the appropriate thing to do.” MBN
14 / October 30, 2012 Milling & Baking News

least — and the emphasis is on at least — six months.” “I think because they have their own open-outcry trading floor, the CME understands the value associated with that, so I think we can expect continuity in the near future,” Mr. Borchardt said. “As we go along, as Steve said, the CME, like all good businesses, will evaluate their cost structure, and if they see value in maintaining the Kansas City trading floor, they may maintain it, and if they don’t, they may not maintain it.” Mr. Campbell acknowledged the decision of the board to recommend the sale of the K.C.B.T. was not taken lightly. “All of the board members and those involved with the review have had a long and passionate relationship with the exchange,” he said, recalling he was first introduced to the K.C.B.T. when he was 15 years old. At that time, he knew it would be part of his life, he said. Mr. Campbell pointed to families who have been represented on the trading floor for decades like the Shays and the Gibsons. He noted the Gibson family has been represented on the K.C.B.T. trading floor for 100 years. “So there is a certain sadness, a feeling of loss, but that’s it.” Mr. Campbell asserted. “We all agreed to serve the exchange as directors and officers, and with that comes a fiduciary responsibility to serve all 192 members, all equity holders. We were charged to look forward and to maintain the long-term health of the contract for its users.” Mr. Campbell noted the change in wheat futures trading, including the dramatic shift toward electronic trading, was a consideration in the process. He said the electronic marketplace drove great value into the exchange. At the same time, it helped reduce volume in the trading pit. “When we looked at the competitive nature of the business in front of us, at the CME and other exchanges who want to aggressively compete in this electronic marketplace, we had to ask ourselves, ‘What role will the K.C.B.T. play?’” he said. Asked what will happen to K.C.B.T. members without seats on the CME, such as independent brokers, Mr. Borchardt said, “Upon closing, the current members will become permit holders under the K.C.B.T. corporate entity, which will survive, and they will be given not just trading privileges but beneficial fee structures for at least 12 months going forward.” MBN
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - October 30, 2012

Table of Contents for the Digital Edition of Milling & Baking News - October 30, 2012