CME Group Inc. (CME:US), owner of the world’s largest grain market, is set to cut trading hours next week as the exchange backs off expanded access that customers complained was too long and eroded market liquidity.
Electronic trading now open for 21 hours from 5 p.m. to 2 p.m. Sunday through Friday on the Chicago Board of Trade will be reduced to 17.5 hours, opening at 7 p.m. before taking a 45- minute break starting at 7:45 a.m., according to the CME, owner of the world’s largest futures market. Both electronic trading and open outcry will restart at 8:30 a.m. and close at 1:15 p.m., the company said.
CME expanded trading to 21 hours from 17 in May to compete with new contracts offered by Intercontinental Exchange Inc. (ICE:US) that trade 22 hours a day. Some market participants said the longer day reduced liquidity and weakened enthusiasm from those who watched prices throughout trading hours. The shorter day will improve the market’s ability to set fair prices, analysts said.
“It certainly creates a little more excitement for the markets,” Mark Schultz, the chief market analyst at Northstar Commodity Investment Co., said by telephone from Minneapolis. “Farmers have mentioned they have a hard time getting motivated to trade when it’s continuously moving.”
The CBOT, where grain has been exchanged since 1877, remains the dominant location for trading. The exchange handled 73.2 million corn futures contracts in 2012, down from 79 million in 2011, according to the CME. Soybean trading rose 15 percent to 52 million contracts last year, while wheat volume rose 13 percent to 27.4 million. Electronic trading in the first three months of 2013 accounted for 97 percent of volume.
The average daily volume for grain and oilseed contracts on the CBOT from June 2012 to February 2013 rose 4.2 percent versus the same period a year earlier, data from CME show. In June, the first full month 21-hour trading was allowed, traders exchanged an average of 997,757 grain and oilseed contracts, CME data show. Corn prices jumped 14 percent that month, partly as the worst drought since the 1930s started to curb production.
Because trading was spread throughput the day, some brokers would “sit for three, four or five hours” without making a trade, Schultz said. Without a break before the opening of pit trading in Chicago, many market participants were put off by the lack of a build-up before the open, he said.
The reduced hours may hurt farmers and elevator operators who buy and sell grain in the early mornings or during the day, said Scott Stoller, a grain merchandiser at Ag Perspective Inc. in Dixon, Illinois. Without the ability to manage their risk against major price shifts, commercial users may be left unhedged for large parts of the afternoon, he said.
“I understand the need for shorter hours for the speculators, however it does a huge disservice for country elevators,” Stoller said in a telephone interview. “Whenever the amount of time you can mitigate risk is lessened, you create more risk. I’m unimpressed with the new hours.”
The National Grain & Feed Association, a Washington group that represents more than 1,050 companies that store, export and process about 70 percent of all U.S. grains and oilseeds, said in a release that a “significant segment” of its members would prefer the CME maintain the 5 p.m. start time for the electronic exchange because they can trade for two more hours.
“Those customers make the point that the proposed change expands the period of time during which they cannot lay off price risk in futures markets,” the NGFA said. “In addition, the 7:45 to 8:30 a.m. central time pause exposes cash grain purchases and sales to added risk during that break.”
The decision to retract the hours was based on more than 4,000 comments from industry participants and its own analysis, the CME said in release on March 5. Company spokesman Damon Leavell said on April 4 that the company has self-certified the change with the Commodity Futures Trading Commission.
Fewer hours will mean more liquidity because the volume of trades will be concentrated into a shorter amount of time, Richard Feltes, the vice president of research at RJ O’Brien & Associates LLC in Chicago, said in a telephone interview. The 45-minute break starting at 7:45 a.m. will give traders time to make buying and selling decisions before the pits open, he said.
“When the markets are open they’re going to be deeper and more liquid than they were under extended trading,” Feltes said. “The break in the morning will allow traders to review overnight news and reassess and reload for the trading day. It will help with liquidity by putting it into a more concentrated period. That’s a plus for the users of the exchange and a plus for the exchange.”
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