Below is a letter from the National Cattlemen’s Beef Association to the CME that originally was posted on the “Points and Figures” blog (commentary follows below).
January 13, 2016
Terrence A. Duffy
Executive Chairman & President
Dear Mr. Duffy:
For several months we have been hearing from our members across the country regarding market volatility and their concerns about high frequency trading’s contribution to that volatility. The concern has been so intense that the National Cattlemen’s Beef Association (NCBA) hosted a meeting with our members in December to further explore their concerns and to identify ways to address the issues. During that meeting we heard from industry traders, economists, and hedgers who delivered evidence and first-hand accounts to support the shared concerns.
Exchanges such as the ones owned and operated by the CME Group have their basis in agriculture. For years, agricultural producers have utilized futures contracts to manage their market risk. 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. 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. These concerns have been focal points during the meetings of state cattlemen’s associations over the past several months, and many of the suggested actions have been drastic In order to stem the tide and maintain producer faith in CME Group risk management tools, NCBA has taken it upon itself to identify critical areas in which we direct your focus. In anticipation of your presentation at NCBA’s Cattle Marketing and International Trade Committee meeting in San Diego later this month, we look forward to comments or action on the following:
Livestock contracts must be monitored, measured, and controlled through the CME Globex Messaging Efficiency Program.
Grain, currency, and index contracts have limits regarding messaging. Livestock contracts must have the same.
A one second latency or delay between trade actions (cancel, cancel/replace, etc.) is imperative to make automatic trading work. Implementing latency will make messaging much more difficult as there will be greater risk of order execution. High frequency trading occurs at a rate faster than any human can analyze. Latency would therefore level the playing field so that everyone sees the market at the same speed.
The CME Group has to be more proactive regarding spoofing
.Identifying spoofing concerns and bringing them to light, rather than waiting until they are reported, would go a long way in showing stakeholders your commitment to addressing this issue.
In order to better analyze and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilized by industry and researchers to better understand trading behavior which could possibly be damaging. Release of the previous year’s data each month should be acceptable in providing researchers with adequate information while also protecting the confidentiality of traders.
As a self-regulated organization, CME Group has the responsibility of regulating and policing any misuse of futures contracts. There are concerns that the CME Group bases most of its investigations from tips or concerns brought forth from those who use the contracts. The CME Group has to actively engage in monitoring and acting upon violations or market manipulation. More importantly, CME Group should be vocal in reporting these actions to stakeholders.
These are actions which we believe will be effective in showing CME Group’s commitment to addressing our concerns, and it will provide our members the confidence to continue utilizing CME Group livestock futures contracts as a risk management tool. NCBA is committed to working directly with you and your team to find a solution to the concerns of our members, but quick action towards a solution is expected.
Philip Ellis, NCBA President
Ed Greiman, Chairman NCBA Cattle Marketing & International Trade Committee
If you talk to old cattle traders, they will tell you that their market is broken. Hog traders have echoed their sentiments. This isn’t sour grapes over losing the floor. It’s about customers like the members of the NCBA that cannot get into and out of large positions when they need to roll contracts without getting run over. The risk of hedging in the plain vanilla futures market is too great. It used to be cheaper to hedge there, but now it is probably cheaper to execute an OTC derivative. However, doing that comes with counter party risk and other costs. The other alternative is to go unhedged.