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CME Group expands private trades in grain markets, raising worries

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Chicago | Reuters – Exchange operator CME Group Inc will allow a type of privately negotiated transaction in all its agricultural markets for the first time on Monday, splitting traders who predict the move will either improve or hurt transparency.

CME Group, which owns the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange, will expand the use of transactions called block trades in its grain and livestock futures and options, such as corn and soybeans. The trades are already permitted in other markets ranging from Black Sea wheat to Eurodollars.

Block trades are large, privately negotiated deals that are struck away from the broader market by phone or otherwise and cleared by the exchange. They must exceed exchange-set size limits and be reported publicly after completion.

The transactions help traders execute large-lot orders at a “fair and reasonable” single price and avoid disrupting prices in markets with lower liquidity, such as deferred-contract months, according to CME Group.

The company has lost liquidity in deferred futures spreads as the rise of computerized algorithmic trading has driven more activity to front-month contracts, said Gary Sandlund, president of brokerage Futures International.

“The exchange is doing a very good thing here in attempting to try to bring that back into the exchange and create a bit more transparency on some of these back-end spreads,” he said.

The expansion of block trading is the latest evolution of the agricultural markets, which trace their origins to grain merchants who formed the CBOT in 1848. The closure of open-outcry futures pits, in which traders shouted out orders to buy and sell contracts, marked the end of an era in 2015, after most transactions went online.

CME Group held calls with agricultural traders to gauge support for block trades, according to a letter it sent to the U.S. Commodity Futures Trading Commission. The transactions should account for a small percentage of overall trading and not reduce liquidity, the letter said.

“An overwhelming majority of market participants are in favor,” CME Group said.

However, the National Grain and Feed Association told CME Group and the CFTC in letters that the change threatens transparency by removing business from the public marketplace. The association represents more than 1,000 companies that handle over 70 percent of U.S. grain and oilseed harvests.

“It is our opinion that when large trades in deferred months are negotiated between parties ‘off exchange’ that price discovery is very likely compromised,” the association told CME Group.

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