By Larry Dreiling
The world of trading grain has changed. Competition for the market's money has become intense in a world where the Oliver Stone movie title "Money Never Sleeps" has become a truism.
The change came with electronic trading on the major traditional U.S. exchanges.
Then, the IntercontinentalExchange, or ICE, began a competition of its own with the traditional U.S. grain trading CME Group.
ICE began in 2000 as an Atlanta-based electronic trading company trading global over-the-counter energy contracts and grew so big as to be able join with the NASDAQ exchange to attempt a takeover of the NYSE Euronext exchange. ICE's intent in its beginning was, its company history describes, to "transform trading by providing an open, accessible, multi-dealer, around-the-clock electronic energy exchange." ICE claimed to offer the energy trading community better price transparency, more efficiency, greater liquidity and lower costs than manual trading.
But on May 14, in response to demand they found from hedge funds and other large traders, the ICE Futures U.S. exchange began trading five U.S. grain and oilseed contracts for corn, wheat, soybeans, soybean meal and soybean oil.
These contracts joined ICE's slate of agricultural futures and options contracts, including sugar, cotton, coffee, cocoa, orange juice, Canadian wheat, barley and canola.
"We are pleased to expand our suite of agricultural contracts based on customer demand and their desire and commitment to trade these instruments on ICE," said Ben Jackson, COO of ICE Futures U.S., said in a statement "These contracts round out ICE's U.S. and Canadian agricultural products. The new grain and oilseed contracts, coupled with our widely distributed, proven electronic platform, offer customers more alternatives for execution, and the flexibility to select the method that best meets their needs."
What made the announcement of ICE's entry into the U.S. commodity market trade so revolutionary was that the exchange would trade the five contracts on a 22-hour cycle. The trading cycle would begin at 7 p.m. (Central time) and end at 5 p.m. the next day. On Sundays, the cycle would begin one hour earlier.
As with the energy markets ICE began with, the exchange looked to large commercial traders, brokers, risk managers, futures commission merchants for its primary users.
The CME Group, knowing it had to keep pace with ICE to retain its supremacy in the global commodities trade, announced May 18 it received Commodities Futures Trading Commission approval to offer expanded electronic trading hours in its Chicago Board Of Trade grain and oilseed futures and options beginning May 20 for the May 21 trade date. Hours expanded from 17 hours per day on the CME Globex electronic exchange to 21 hours per day from 5 p.m. to 2 p.m. Central Sunday to Friday.
Products included in the expanded hours are CBOT corn, mini-sized corn, soybeans, mini-sized soybeans, wheat, mini-sized wheat, soybean meal, soybean oil, rough rice, oats, and ethanol futures and options plus all related calendar spread options and inter-commodity spread options.
Daily settlements are now based on market activity at 2 p.m. Central each day. Additionally, open-outcry trading hours continues to operate from 9:30 a.m. to 2 p.m. Central Monday to Friday. Open-outcry trading at the Kansas City Board of Trade and Minneapolis Grain Exchange has followed Chicago's cue and moved to the new hours, as well.
Then, just a few days after the CBOT launched expanded electronic trading hours, a new twist in trading in Chicago was announced.
On May 25 CBOT said it would launch expanded floor trading hours in its grain and oilseed futures and options exchanges during major U.S. Department of Agriculture crop reports. The floor trading open changed to 7:20 a.m., from 9:30 a.m., on mornings of specified reports beginning June 12.
The major USDA reports that will initiate early opening include those for World Agricultural Supply and Demand Estimates, Crop Production, Prospective Plantings, and Acreage.
Products included in the expanded hours are CBOT corn, soybeans, wheat, soybean meal, soybean oil, oats, and rough rice futures and options.
It's this "money never sleeps" attitude, with new, early trading times, while considered a further business-oriented response to ICE's move into traditional grains and oilseeds, has created lots of controversy. It has been seen by longtime, traditional traders as wrecking havoc on markets that already have seen plenty of volatility in the last few years.
"How can you have a report when the markets are open," Mark Gold, managing partner of Chicago-based Top Third Ag Marketing, said. "The first three minutes on a day like that will be so volatile. It could be up 10 cents and down 10 cents in three minutes."
Gold blamed the volatility as much on the methods traders receive information--generally through commodity wire reporters sending data tied to USDA Internet connections at National Agricultural Statistics Service "lockup"--as on the new timing of the floor trading open.
"It's going to be worse than Trading Places, because it's not just one number coming out. If it were just one number coming out where subsequently everybody's information system got that information at the exact same time, fine," Gold said.
"But some of these systems work on a two- or three-second delay, so you could have a real (problem), because traders look at corn first, then the soybean complex and then wheat. How is a trader supposed to digest this information? It's ludicrous what they're doing here. They are sticking it to everybody but the computer traders."
The CFTC, Gold said, should never have permitted ICE to function under the hours they now are allowed to operate.
"It was a situation that if ICE is going to be open at 7:30, then the CMEs have to be open at 7:30, too," Gold said. "The fact that NASS is releasing multiple numbers in different commodities creates an absurd, unnecessary, exercise in managing risk. If it were just one number being released, maybe I could see it. But it's more than one number, and more than one number per commodity plus there's multiple commodity numbers being released.
"How can a trader look at all those numbers at one time? If you look at one number, does another number get away from you? It's nuts, and they never should have allowed it. "
"The fact that these markets are open 21 hours a day is ludicrous," Gold said, while admitting that 95 percent of the market volume is electronic trading. "It gives no human being any chance to recoup their thoughts or to have any rest."
Gold's approach to marketing is to help farmers use options, rather than futures, to manage risk. While he said he thinks he and his client will be able to sleep given as how they are in the futures trade, he doubts his friends who trade strictly futures will have much of a life without being lassoed to an electronic trading device almost every hour of the day.
"There's going to be no sleep, because now it's all in the hands of computers. For the brokers who trade futures, I just don't know how they're going to do it. This kind of trading puts so much pressure on people. I just don't know they're going to do it," Gold said.
For farmers using futures, it will require them to have their trade orders in place before the open, Gold said.
"They'll have to be orders that you can live with because computers act faster than humans. It's like going into a gunfight with glue in your holster," Gold said. "You need to give the guys who trade this time to absorb the information.
Gold's solution: Close the markets from 7:15 to 9:30 on report days, then open everything back up again at 9:30 as things were done before.
"What they're doing right now makes no sense. Computer traders will make a fortune, because every time we pull our gun out of our sticky holsters to pull the trigger, they will have fired 50 times," Gold said. "You can't beat them trying to out-trade them on report days."
The CFTC, Gold said, has to recognize that trading grains and oilseeds are different than trading financials because of the wide variety of things traders have to look at in order to help their clients.
"There's different crops, different commodities, different carryouts, different supply and demand issues. It takes time to analyze them. It does not benefit the people for whom these markets were designed to help. It now only benefits speculative traders. The speculator's role is to add liquidity, now they generate volatility."
In his company's defense, Ben Jackson, chief operating officer of ICE Futures U.S., was quoted in an interview with Reuters that nearly around-the-clock trading will allow market participants to see how U.S. Department of Agriculture crop reports affect grain prices that formerly moved only in over-the-counter markets.
The push into around-the-clock grain trading has raised concerns, as futures and options markets have traditionally stayed shut when crop reports are issued.
"When the markets close, a limited pool of the customer base--your significant global traders, your banks--they immediately shift to the over-the-counter market," Jackson told Reuters.
"When we provide an open, very transparent liquid futures market during that time after the USDA reports come out, they now have an ability at a minimum to see exactly what's happening."
One person who thinks the new trade day is here to stay is Jack Robinson, vice president of Austin, Texas-based RWA Financial Services, Inc. Farmers will have to adjust to the new trading environment, but it does not mean there eventually be ways for them to take their own advantage of it.
"Once the barn door is open, it's open, and we'll have to deal with it," Robinson said. "These new, competitive forces will continue to drive the market and we'll have to deal with a continuous flow of market information."
As time goes by, Robinson sees solutions coming from local sources, rather than Washington or Chicago.
"Will larger, multi-location grain elevators in the central and southern Plains have an overnight trade desk? I don't know. I certainly think it will mean a new opportunity for them to provide more services to assist farmers. We have some enterprising people in these elevators. There will be creative ways to deal with it."
At the multi-location elevator level, Ben Brandvik, grain division manager for Frontier Ag, Inc., at Goodland, Kan., said he likes the expanded trading day.
"You had open-outcry closing at 1:15 while the electronic trade closed at 2, while showing the close for the pit trade," Brandvik said. "Now that's all moving to the same time of 2 p.m. At our company, we'll buy grain anytime, but it was hard to buy during that 45-minute period.
"We operate over two time zones, so it will help simplify our work."
Brandvik said his firm may eventually make trades on the ICE, but he wants to see volume behind it.
"It's kind of a catch-22, with lack of volume making me not want to trade," Brandvik said. "ICE's initial margin requirements and their maintenance margin requirements right now are very attractive, considering these higher commodity prices where working capital tends to get crunched. But I suspect that as soon as volume goes up those requirements will be right up there with the CME."
As for trading on days when NASS reports are released, Brandvik admits there will be more volatility, but he says he and his team have become accustomed to it.
"Ten years ago, when the market moved 10 cents, it was a major event," Brandvik said. "Today, it's a non-event given as how trading limits are so high now. As for me, and my team here, we plan on being like everyone else; watching the reports and reacting accordingly. If we have solid basis established and the markets get carried away, dropping 40 to 50 cents, and we're buying grain, we'll now have the ability to hedge the grain as soon as possible.
"There may some groups wanting to make a big fuss over this, but it is what it is and we'll decide if we want to buy grain on those mornings or postpone a bid until things settle down. There's lots of ways to handle this."
Larry Dreiling can be reached by phone at 785-628-1117, or by email at firstname.lastname@example.org.