CME Group will shorten trading hours for livestock contracts effective Monday, Feb. 29.
The move follows escalating criticism that extreme volatility has rendered cattle futures effectively broken for cash market hedgers. Cattlemen have pointed to many factors in that volatility, most prominently the rise of automated trading and the shrinking number of cattle traded on a cash-negotiated basis.
Pending approval by the Commodity Futures Trading Commission, live cattle, feeder cattle and live hog futures and options will trade electronically from 8:30 a.m. to 1:05 p.m. Central Time Monday through Friday. Open outcry hours will be from 8:30 a.m. to 1:02 p.m. CT. The daily settlement period and procedures will remain unchanged.
“I think it’s pretty cosmetic,” DTN Livestock Analyst John Harrington said of shortening the trading day. “I think they’re fishing around for ways to get volatility under control. I suppose it’s worth a try, but color me skeptical for the moment.”
CME shortened electronic trading hours in October 2014, reducing them from 23 hours per day to the current schedule, which varies by day. On Mondays, Globex trades from 9:05 a.m. to 4:00 p.m. CT. From Tuesday to Thursday, it trades from 8:00 a.m. to 4:00 pm., and on Fridays, the market is open from 8:00 a.m. to 1:55 p.m.
The shorter day will align trade with the period of greatest liquidity, CME said. During 2015, roughly 87% of daily livestock futures and options trades occurred during the proposed hours.
“Nothing is more important to us than the integrity of our markets, which help farmers and ranchers to discover prices and transfer risk,” said Tim Andriesen, CME group managing director of agricultural products. “We believe these actions will further enhance our cattle markets for all participants.”
CME also announced several other changes, including a review of the Worthing, South Dakota, delivery point for live cattle and the formation of a cattle market joint working group with the National Cattlemen’s Beef Association to discuss other possible changes.
On Jan. 13, NCBA sent a letter to CME Group outlining its concerns with automated trading, spoofing and lack of transparency.
“The effectiveness of cattle futures contracts as a viable risk management tool is being called into question due to the concerns over high-frequency trading,” the letter stated. “In fact, we continue to hear our members question their use of the cattle contracts because the volatility has made them a tool which is more of a liability than a benefit. This is counter to the very existence of these contracts.”
As of Feb. 1, CME added livestock contracts to its messaging efficiency program, which regulates the speed and quantity of trade signals a market participant can send. It was one of the five requests NCBA set out in its letter.
NCBA is not the only cattle group to complain about the cattle market. R-CALF USDA sent a request to the Senate’s Judiciary Committee asking for an investigation into the sharp drop in cattle prices in late 2015.
DTN’s Harrington thinks there’s a bigger issue underlying the cattle market’s woes.
“I think the problem is a little more fundamental. It’s the disconnect between the futures and the viability of cash markets. We trade so few cash cattle on negotiated basis anymore. I think that’s a major problem, but I’m not quite sure how you solve that.”
For futures markets to have a degree of stability, they have to be in close coordination with the underlying cash market, he said. There are macroeconomic issues — the stock market and the oil price collapse — for example, that can affect volatility in cattle.
“I think commercials are really having a difficult time using futures now because of the volatility, because of the unpredictability of its behavior and effect on basis,” he said. “Basis is essential to hedgers and risk managers. If they can’t depend on the relationship, then it’s just a wild guessing game.”