In Life and Commodities the Only Thing Constant is Change

Futures trading is in a constant state of change. Whether it is new product contracts, evolution of electronic trading, globalization, or supply/demand disruptions, the markets seem to always be changing. These changes are each traders own responsibility to keep abreast of.

One of the recent changes in the Futures markets I would like to address is the decision of the CMEGroup Exchange to shorten the Livestock trading hours, after doing the same thing to the Grain markets back in late 2012.

When the Exchanges make these kinds of decisions this involves tradeoffs between diverse client points of view – electronic and floor traders, commercial traders, managed money traders, domestic and international customers.

The primary objective of any Futures Exchange is to preserve the health and integrity of any product that trades on their Exchange. At the same time they must maintain that their products are still effective risk-management tools for all of their customers.

Their goal is to maintain a marketplace that continues to attract a diverse pool of participants, both from the Commercials and Speculators. Any Exchange that does not provide this marketplace to the participants will lose their diverse pool of traders. The Exchanges must continue to provide balance between the Agricultural Hedgers (Commercials), who are the Exchanges primary purpose of being in business for, with those of the Speculators who provide the liquidity for Hedgers to transact their hedging needs.

Speculators both large and small must be heard as to what their needs are in order to provide this liquidity. Some key roles for the larger automated traders is providing liquidity to keep the bid and offer prices close to one another in the electronic trading, as well as the handful of smaller speculators providing market making services on the trading floors (floor traders). All of these participants together make the markets the efficient machines they are each day by working together.

When the CMEGroup decided to shorten the Grain trading hours they heard from all of these diverse groups of traders. What they heard from the Commercials was that the longer hours were not providing the liquidity they needed to conduct business. And the large speculators who provide the algorithm trading to provide this liquidity were complaining the longer hours put a strain on them to keep the liquidity pool deep for so many hours.

Once CME Group heard all the input they made a decision to shorten the Grain markets trading hours. They also heard the consensus was they wanted the market to close at 13:15 CT. Some of the feedback they heard was:

• Strong support for the morning suspended trading session. It was suggested this provided structure to the market and built liquidity on the resumption of electronic trading and the opening of the Regular Trading Hours (RTH).

• Some of the smaller country elevators were against any break as they wanted access to the market during the morning hours

• The majority had a strong opinion that is was important to have early morning hours because there was early morning reports released and European customers were in the middle of their trading day

After hearing from this diverse group of traders the CME Group decided on a suspended session from 07:45 – 08:30 CT as a balance between all of these conflicting customer desires.

Soon the Grain markets were trading a shorter trading day and the increased liquidity helped all participants to facilitate trade with a fair hand each day. Having a shorter trading day is not so bad, the shorter the duration of trading the more activity that must be conducted during this time. Results – increased volatility and liquidity at the same time.

Recently the Livestock market followed the Grain markets. In October 2014 their trading hours were changed to reflect both the Commercials and Speculator’s needs. Just like the Commercials in the Grain markets they were complaining there was not enough liquidity at night time to do business. The large speculators providing liquidity as algorithm traders were complaining the longer hours did not allow them to provide liquidity for this duration. Does this sound familiar from the Grain markets?

The Livestock markets are different than most other asset classes. This asset class has a wide range of traders with interest in these markets. A cattle rancher in Oklahoma, for example may have very different concerns than a hog operator in North Carolina. This created different needs for a wider range of trading hours. Then there were regional concerns of opening too early for cattle producers in the Mountain time zone, or too late for hog producers in the Eastern time zone.

After taking into consideration all of the input from Livestock traders the CMEGroup decided these will be the new Globex electronic trading hours for all Livestock products effective October 27, 2014:

• Opening on Monday morning at 09:05 CT and closing at 16:00 CT

• Tuesday through Thursday opening at 08:00 CT and closing at 16:00 CT

• Friday opening at 08:00 CT and closing at 13:55 CT

An interesting study found that 98% of the day’s trading volume was traded during these hours prior to the shortened trading schedule. We all know that higher volume is better liquidity and we need that to trade more efficiently.

During this review period of changing the trading hours the Exchange had to view markets a little differently. Markets like Corn, a global contract where people all over the world need access at all hours needs different trading hours. Livestock contracts tend to be more regional. A large percentage of hedging is done within the United States. This is another reason the Exchange wanted to ensure liquidity in place of market access and keep the liquidity deep enough for those who need it the most.

This change in trading hours is the first since 2007 when the Exchange first went to longer electronic trading in the Livestock market. While at the time it seemed a good plan, the night sessions proved to be very low in liquidity and provided no benefit to the Commercial traders and created more challenges for large speculators to provide constant deep liquidity. 

“Life is 10% of what happens to you and 90% of how you react to it” Charles Swindoll

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