Electronic trading of grains is now dominating markets that not long ago were the last bastion of arm-waving, shouting pit brokers, but the easy access to prices and speed has come at a price – wild market swings and lack of trust that is driving away users.
The focus of the controversy on the Chicago Board of Trade grain floor is the exchange’s wheat contract, already under withering fire from the grain industry as a “broken” market that no longer responds to grain supply and demand as it has for the past century.
CBOT parent company CME Group and U. S. regulator the Commodity Futures Trading Commission have for months been investi -gating grain industry complaints claiming huge flows of Wall Street capital have ruined the CBOT wheat contract – the world wheat price benchmark – as a tool to hedge risk.
But the latest controversy has wheat traders pointing the finger at the exchange’s electronic trading system, Globex, and its software, including the algorithm that controls order flows and price displays. Traders now claim those are broken, too.
CBOT wheat pit traders say “phantom” bids and offers regularly appear on the screens at the day-side market open or when price movement gets volatile. Once a few trades are made, they say, orders evaporate, comprising the integrity of both open outcry and electronic markets.
Complaints also cite large electronic bids and offers that are pulled a minute to 30 seconds before CBOT grains open.
“That is trying to influence where people place their opening orders,” said one off-floor CBOT trader who requested anonymity. “I see those as counterproductive and actually damaging to the Board of Trade’s reputation. I’d like them to identify who’s doing that and put a stop to it.”
Concerns escalated this week as CBOT floor traders circulated a letter within the wheat pit that outlined their worries. CME exchange staff met with corn traders to explain a 10-cent jump in one second’s time that occurred a week ago.
“Back-month traders and member firms said deferred contracts are often flat price traded at prices drastically different from the Globexforced ‘on balance volume’ settlement price. Many times flat-price orders are left unfilled with settlement prices through their limits,” the letter stated.
“The traders in the wheat pit question if electronic traders are providing true liquidity to the marketplace or is their quest ionable activity driving primary risk taking market makers away?” the letter said.
CBOT grain traders for years fought the tide of electronic order matching that swept – and took over – the exchange’s giant financial futures contracts. But over the course of the last two years, that tide has rolled over the grain floor.
On Nov. 18, for example, 83 per cent of the CBOT’s corn contract’s volume of 197,806 contracts traded electronically. For soybeans, the screen traded 85 per cent of 135,444 contracts and for wheat it was 94 per cent of 83,454 contracts traded.
Traders say CME must adjust its software for the Globex screen platform, which weights trades based on order size.
“Floor spread traders gave numerous examples to the Globex staff of ‘spoof markets’ where huge ‘best bids’ and ‘lowest of fers’ placed on the electronic markets, using the existing algorithm, disappear and are cancelled when someone attempts to trade on that market,” the wheat pit traders’ letter said.
CME economist David Lehman said there are already limits on the size of orders placed electronically – 1,000 contracts for outright positions and 2,500 on spreads – but there can be a number of orders on the same side of the market.
“There are always market conditions that might result in different perspectives on how our products are working or how our trading systems are performing. So our goal is to ensure that they are working,” Lehman told Reuters. “We welcome the feedback.”
He said the exchange monitors its algorithm system, has adjusted it to meet market needs, and will continue to do so.
The latest controversy comes with the futures industry on alert for more market oversight and regulation with the coming Barack Obama administration.