ANALYSIS - Continued producer concerns about volatility in the cattle futures market has inspired change and started a new conversation between the National Cattlemen's Beef Association and the CME Group.
“Recently the cattle markets have been susceptible to volatile limit price moves without corresponding market news,” said Mr Woodall, NCBA senior vice president of government affairs.
“The result has been decreased confidence for cattlemen using the futures markets as a risk protection tool. This is not an issue for the government to address, but an issue the industry can resolve by working with CME.”
NCBA has asked CME to address specific areas of concern including implementing a delay between trading actions, greater enforcement against market spoofing, monitoring and reporting of market misuse, and the release of audit trail data.
“While CME has announced certain measures, the effect of automated trading remains unresolved,” said Mr Woodall. “The market needs liquidity, but it must also serve the function of a meaningful risk management tool."
Mr Woodall said they are merely asking for a level playing field between speculators, commercial traders, and producers, and without it, the cattle industry loses a critical marketing tool. Ahead of any proposed changes, NCBA expects the CME address the suggested actions through the working group.
Following is an excerpt from the letter the NCBA sent to Terry Duffy, Executive Chairman & President at the CME Group on January 13, 2013, 2016 critical areas of focus:
- Livestock contracts must be monitored, measured, and controlled through the CME Globex Messaging Efficiency Programme. Grain, currency, and index contracts have limits regarding messaging. Livestock contracts must have the same.
- 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 analyse. Latency would therefore level the playing field so that everyone sees the market at the same speed.
- 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.
- In order to better analyse and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilised by industry and researchers to better understand trading behaviour 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.
- 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.
See read the full letter sent to Mr Duffy, click here.
The CME Group responded with a personal visit by Mr Duffy to the NCBA Cattle Marketing Committee meeting held during their annual conference in San Diego in late January.
In a live interview with Brownfield Ag New's Ken Anderson, Mr Duffy said, "I think it's really important that we come up with a viable solution that is a three to five-year proposal. You aren't going to come up with a design or a change in the one of the specs that's going to see the cattle contract survive another 25 years. You have to continually work at it because the market is constantly evolving. We are seeing the cash trade be less and less on a daily basis."
Following the meeting, the CME announced an immediate change, which was adding livestock products to its Messaging Efficiency Program starting Monday, February 1.
It also said it will take a number of steps designed to further enhance its livestock markets including:
Reduction of CME livestock trading hours:
- CME livestock futures and options trading hours were reduced to align with the period of greatest liquidity in these markets. During 2015, roughly 87 per cent of daily livestock futures and options trades occurred during the proposed hours.
- Effective Monday, February 29, trading hours for Live Cattle, Feeder Cattle and Lean Hog futures and options are as follows:
- CME Globex futures and options – 8:30 a.m. to 1:05 p.m. CT Monday to Friday
- Open outcry options – 8:30 a.m. to 1:02 p.m. CT Monday to Friday
Review of Worthing, South Dakota delivery point for Live Cattle futures:
- CME Group will conduct a public review with cattle customers to study if a discount is warranted at its Worthing delivery point for Live Cattle futures. The review will take place during the month of February and potential changes will be announced during Q1 of 2016.
Formation of a cattle market joint working group:
- CME Group formed a working group with the NCBA to discuss other possible enhancements to its cattle markets, including, but not limited to, circuit breakers and other measures to further heighten market quality.
To hear all of Mr. Duffy's comments and Missouri cattleman and NCBA Marketing Committee member Clint Berry's reaction captured by Brownfield's Ken Anderson, click here.