KCBT revises proposed trading hours to 5 p.m. to 2 p.m.

May 18, 2012
by DTN

CME Group has withdrawn its proposal to expand electronic grain trading hours to 22 hours per day, according to a Commodities Futures Trading Commission (CFTC) spokesman. The Kansas City Board of Trade (KCBT) also pulled its parallel proposal and submitted a new one, in which electronic trade would open at 5 p.m. and close at 2 p.m. starting May 31.

A CME spokesman declined to comment on whether the Chicago Board of Trade will submit a new rule to match KCBT. The two groups initially coordinated the May 3 announcement of a 4 p.m. to 6 p.m. trading day.

CFTC’s spokesman said that since CME withdrew the rule instead of amending it, any new rule change starts the process over again. That means there will be a new 10-day review period for CFTC to examine the impact if CME Group submits a new proposal.

CME’s and KCBT’s announcements that they wanted to expand electronic trading hours raised a lot of questions about discrepancies between pit settlements and the electronic close, how elevators would figure cash grain bids, and whether or not USDA would release its World Agricultural Supply and Demand Estimates and crop reports while electronic markets were open.

Tana Williams, with independent brokerage firm Southwest Commodities, told DTN the initial 22-hour trading day would have meant expanding office hours, creating an extra branch office, and working longer hours to finish up paperwork.

“A change by the CME to trim hours back to a 2 p.m. close and a 5 p.m. open would likely be well received by the U.S. grain indus try,” DTN Senior Analyst Darin Newsom said. “It seems that the CME has acknowledged some of the concerns of those in the cash grain industry without ruffling the feathers, at least initially, of the fund traders it was looking to satisfy to begin with.”

CME announced its plan to expand its trading hours after rival IntercontinentalExchange (ICE) announced a similar set of grain trading contracts would be available on its 22-hour-a-day electronic platform. ICE charges a fee per transaction, has lower margin requirements, and its contracts don’t require physical delivery at expiration (they’re cash settled), making ICE an attractive venue for speculative traders.

Williams said her firm uses ICE to hedge cotton, but now the firm’s advisers have to advise their clients on which exchange to use.

“We will encourage them not to use the ICE for hedging, but will more speculators go to the ICE grains since they’re cash settled and not risk the delivery constraints of the CME grains?” she asked. “And what will that do to the volume in the CME grains? So far, there has been very little volume at the ICE, but I’m sure that will increase with time.”

Southwest Commodities is based in Clovis, NM, and Williams said her staff works from 6 a.m. to 3:30 p.m. MT. The 22-hour schedule with a 4 p.m. close would have added two hours and 45 minutes to her day. She said she welcomes an earlier close, such as the one KCBT announced last Wednesday.

The change of rules also buys a little more time for USDA to discuss whether or not it will change the release time for its monthly supply and demand reports. Last Tuesday, brokerage firm R.J. O’Brien called for a trading halt from 7:15 a.m. to 9:30 a.m. on report mornings.

Others have called for USDA to release the reports during the market’s down time.

“My guess is the next move will be by USDA to change the release time of its reports to 3 p.m. (CT) in response to concerns from some brokerage houses regarding the need for a two-hour cooling off period from release to market open,” Newsom said. “From an analytical point of view, this makes sense. Kneejerk reactions will continue to distort markets following reports, but at least now some semblance of the status-quo will remain, giving analysts time to evaluate the numbers.

“The bottom line is this seems to be a win-win compromise for both fund and commercial traders, with investors getting longer hours to trade and those in the cash market maintaining the ability to set closing prices for the day,” Newsom said about CBOT matching KCBOT’s new 5 p.m. to 2 p.m. schedule. — Katie Micik, DTN