CME reporting error on wheat

Dec 7, 2012

A recent reporting error, coupled with the nearly around-the-clock trading of CME, has left some commodities traders with losses and questions.

Thursday, Nov. 29, CME closed trading on wheat and its other commodities as usual. Its initial Deliverable Commodities Under Registration Report erroneously reported the number of wheat contracts available for delivery as substantially lower than accurate. CME later issued a corrected report, but by then, electronic trade for Friday had already begun. CME has promised to compensate traders affected by the mishap.

The first CME report was issued at the usual time of 4 pm CST and showed 164 wheat shipping certificates registered. The corrected report, issued at 5:46 pm CST, included the 2,000 registered wheat shipping certificates from the Andersons’ Conant and Illinois Facilities which had been neglected in the original report.

A shipping certificate represents available physical supplies for delivery registered with the exchange.

The impression of extremely tight supplies triggered investor behavior both in wheat and corn. When traditional trading opened the next day, the sudden large increase in available wheat deliveries well beyond expectations, traders were caught by surprise.

Prices for December contracts were put under pressure from the higher than expected deliveries and wound up losing 24.5 cents to settle at just under $8.45/bu. The spread on December versus March also widened as a result of the loss, from 16.25 cents on Thursday to 18.75 cents on Friday.

Some traders reported having lost money because of the error. They made decisions based on the belief there was a tight supply of deliverable contracts, and those moves were not supported by the realities of the market.

Chicago Board of Trade floor trader and commodities broker Todd Thielmann told Reuters he lost money on both corn and wheat futures because of the error. The cross over to losses in corn stem from the interconnectivity of the markets given both grains’ use as livestock feed. The actions of wheat markets often spill over into corn markets and vice versa.

For Thielmann, the 164 contracts listed in the inaccurate report at the time did not pose a significant risk to his long position in nearby December wheat.

“I felt I could stay in my trade without any problem. I lost some money and I didn’t feel like I did anything wrong. I felt like I was responsible in assessing the risk.”

Thielmann and others who experienced similar issues with the error are considering making claims against CME for the loss.

In its statement released the day after the problem report was released and corrected, CME said it “will assume responsibility for actual losses associated with this reporting error.”

Some question has arisen how this assumption of responsibility will work. Citigroup futures specialist Art Liming pointed out an issue with the claims situation.

“Basically anybody that has a loss could put in a claim. How are they going to determine which claims are valid?” Other concerns about CME’s abilities have been raised in the wake of the reporting error. The short time between the end of trade for one day and the resumption of trade for the next resulting from the nearly-continuous trading hours likely exacerbated the fallout over the error.

“If they want to trade around the clock, they need to get their act together on basic announcements,” commented Charlie Sernatinger, vice president of sales at ABN AMRO Ltd., a Netherlandsbased investment banking firm with offices in Chicago.

In May of this year, CME shifted to a 21-hour trading schedule, up from its earlier 17-hour schedule. This move came shortly after competitor IntercontinentalExchange moved to an expanded trading day.

Those concerned about CME’s control over agricultural commodity markets may have something else to worry about. CME Group announced Monday, Dec. 3 that it had completed its longstanding effort to acquire commodities rival Kansas City Board of Trade (KCBT). The deal began back in October and was settled for a cash payment of $126 million.

The acquisition effectively puts CME Group in control of all of the country’s wheat futures by adding KCBT’s leading market in hard red winter wheat to its existing soft red winter wheat futures and options.

“We’re pleased to complete this transaction, combining KCBT Hard Red Winter Wheat products with our deep and liquid CBOT Soft Red Winter Wheat futures and options markets,” said CME Group Executive Chairman and President Terry Duffy in the group’s announcement of the deal.

“The integration of these two global wheat benchmarks will provide new trading opportunities to commercial grain market participants, wheat traders and customers who continue to rely on these tools to manage their price risk.”

Starting Monday, Dec. 10, CME customers will be able to take advantage of the new offering. Full integration of KCBT’s services with CME’s is expected to be completed sometime in 2013’s first quarter.

Anyone who feels they suffered losses as a result of the wheat reporting error can submit claims to CME. Customers can contact CME Group Market Regulation at 312/435-3658 or 312/341- 7757 with any questions. — Kerry Halladay, WLJ Editor