Computer Trade Looms Over CBOT Grain Pits
Sunday May 25, 1:50 pm ET
By Chris Stebbins
CHICAGO (Reuters) - Screen-based electronic trading is blowing winds of change through Chicago's embattled futures markets, but in the city's bastion of open outcry trading -- the grain pits -- brokers still do it the old-fashioned way.
ADVERTISEMENT
Electronic "matching" of bids and offers for futures contracts has taken the industry by storm, freeing up users from paying commissions to arm-waving brokers in the crowded trading pits of Chicago.
The 155-year-old Chicago Board of Trade (News - Websites), dominant in futures trade of decades, was knocked off its pedestal several years ago by the all-electronic Eurex exchange in Germany.
"Early next year, there's a strong possibility that you'll see electronic trading of grains ... a mini-grain contract," during the day when the pits are open for business, said John Lothian, president of the electronic trading division with The Price Futures Group in Chicago.
"There's tremendous customer demand for it," he said.
A broker on the grain floor agreed that electronic dealing is threatening the traditional way of doing business in agricultural futures markets: "They're spooked down here and worried they'll see what happened in the financials happen here."
Electronic matching has now even crept into the CBOT's own markets as global traders demanded the exchange list its financial contracts on a computer screen simultaneously with floor day trading four years ago. The CBOT Treasury bond and other financial futures complex had 60 percent of its volume over screens -- with pit brokers down to 40 percent, according to an exchange report issued in the first quarter of the year.
Today, electronic trading accounts for 70 percent of the world's top three futures exchanges' volume, with nearly all of it financial contracts. That's up from less than half of the volume, roughly 45 percent, in 2000.
But not all agree that humans will be replaced by computers. Unlike the relatively straight-forward equations for yields and currency values that rule financial futures, the agricultural markets require a sense of how hard-to-predict crops are doing, and of who is trading and why, say industry officials and brokers.
Floor brokers, as middlemen between growers and consumers, play a critical role in putting money into the markets that might otherwise freeze when buyers and sellers reach a stalemate over the price of commodities.
While financial futures traders look at what's happening shorter term, grain traders try to look over the horizon. CBOT grain pits every day trade many thousands of contracts in pairs or "spreads" between delivery months sometimes more than a year into the future, buying one and selling another in unison.
These trades -- such as old-crop/new-crop spreads, soft red winter wheat versus hard red winter wheat spreads, or "crush" spreads between soybeans and soymeal and oil -- are vital to grain companies using futures and their lenders who require "hedges" as loan collateral. Pit trading also gives market participants more clues about who is trading and why.
"Replicating what you see in the pit, especially when you're doing a wide variety of calendar spreads and intermarket spreads and old-crop/new-crop and complicated option strategies -- getting that on a screen and getting the liquidity to move there takes time," said Steve Assimos, North American execution manager at Cargill (News - Websites)Investor Services, a big futures brokerage.
But even CBOT traders acknowledge that, due to the costs associated with the pits, some type of screen-based trade will probably elbow its way onto the exchange's grain floor soon during the pits' traditional day-time, open-outcry hours.
"I don't think you would get anyone to say they want electronic trading instead of open outcry. But they certainly wouldn't mind electronic and open outcry, side by side," said Thomas Coyle, head of the National Grain and Feed Association risk-management committee and general manager with Chicago and Illinois River Marketing, a unit of grain merchant Nidera Inc.
TO SPREAD OR NOT TO SPREAD?
Even though they process information quickly, computers are not as efficient as floor traders bidding nose-to-nose over the incremental price of a futures spread. While computers reduce the cost of transactions, customers pay a cost when there are poor matches, or "fills," on trades -- or no fill at all. One missed 1/4-cent "tick" on a 5,000-bushel grain contract would cost a customer $12.50.
Ultimately, it could be a mix of electronic and open-outcry that rules in the pits, some say.
"The day is coming when you'll see (daytime) electronic trading of grain contracts. It could be six to 18 months, and it might not be the Board of Trade," another CBOT floor trader said.
But without a foreign competitor leading the way by introducing a successful electronic ag futures contract, it's unlikely that the Chicago dealers will abandon the noisy pits for the library quiet of computer dealing.
"Until that point in time there isn't enough tea in China to make the Board of Trade politically call the question of side-by-side in ag trading," one veteran CBOT trader said. |
