Competition and extended trading hours spurs changes, market concerns

May 11, 2012

On May 14, IntercontinentalExchange Inc. (ICE) launches its new grain commodity futures with a 22-hour trading day. This competitive move has put agcommodities giant Chicago Mercantile Exchange Group (CME) on the defensive. The USDA and market analysts have been hardpressed to foresee the market impacts and warn of potential trade disruptions.

ICE began in 2000 as an electronic trader of over the counter energy commodities such as coal, crude and refined oil, natural gas and electricity. It later expanded into some agricultural commodities, most notably sugar, coffee, cotton, orange juice and canola.

On April 12, however, ICE announced it was expanding into grains and oil seeds; corn, wheat, soybeans, soybean oil and soybean meal. As with its other traded commodities, its grains trade are to operate on a 22-hour electrical basis.

Brookly McLaughlin, communications manager of ICE said that the move to U.S. grains and oil seed trading was the result of demand.

“The number one thing for us was it was something our customers were asking for. It was based on customer feedback.”

In an earlier question and answer session with analysts, ICE Chairman and CEO, Jeffrey Sprecher, expanded upon this point.

“…[W]e have just been inundated by customers that have asked us to do this. We have a current agriculture business as you know and so as we’ve run that business and gotten to know people and our relationships have deepened, we just see more and more large agribusiness firms that are dissatisfied with the current offerings. …”

When asked if the recent collapse of MF Global—the derivatives broker/clearinghouse overseen by CME—and its subsequent chilling effect on consumer trust in agricultural futures markets had anything to do with the expansion, McLaughlin said no. She explained that ICE had been planning the expansion well before MF Global’s collapse.

Additionally, McLaughlin said the expansion into the U.S. grains market was the natural progression of the group’s agricultural offering which recently expanded into the Canadian wheat market. “So this kind of rounds out our offering,” she commented.

ICE is often said to be the biggest rival to CME, the largest trader in agricultural commodities, and ICE’s announcement spurred action in the industry leader. On May 3, CME confirmed earlier rumors that it would be extending trading hours to match the 22-hour trading day of its competitor.

Monday, May 21, will see the beginning of CME’s new hours where “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” will be available electronically almost all day. No mention of ICE was made in CME’s announcement, but the rivalry between the two groups plus the timeline of the announcements and the debut days suggests little else.

Market concerns

Concerns have been raised regarding the impact of the extended hours on trading markets. Under ICE’s (and soon CME’s) extended trading hours, USDA reports— particularly its supply and demand reports—will be released during trading hours.

Historically, days which see USDA crop reports also see wild volatility in the crops reported upon. This has been when CME was trading on a split trading day of roughly 17 hours where trading was not open when the reports were released. Analysts and even the USDA are concerned that the move to extended hours may lead to even greater volatility and instability in the key grain markets.

“The problem with this is that High Frequency Trading firms and Algorithm trading systems that are co-located next to the CME Globex servers in Chicago will be able to retrieve US- DA data and trade on it within mili-seconds of the release of the numbers before the rest of the trading community even sees the data,” commented Troy Vetterkind of Vetterkind Cattle Brokerage in a market report following CME’s announcement.

“This will be very detrimental to the commercial/ producer hedge community as well as the overall trading community as the HFT/ ALGOs will have already traded the numbers and distorted the market before anyone can react to them.”

This concern would apply to ICE’s electronic trading system.

USDA’s National Agricultural Statistics Service is reportedly studying the potential impact of releasing its reports during active trading. Prior to the trading hour extensions, USDA timed the release of its reports just after the close of markets to allow market participants sufficient time to examine and digest the information.

Rumors and speculation exist that the USDA may alter its report release times in reaction to the extended trading hours. Hubert Hamer, chairman of the Agricultural Statistics Board said NASS is examining the impact the 22-hour trading day will have on its report release calendar. “Any change to the report release schedule is complex, has far-reaching impact and would be taken very deliberately,” he said. — Kerry Halladay, WLJ Editor