Steps are being taken by CME Group to address volatility in the cattle markets, although producers will still have to deal with a bearish marketplace.
In January, representatives from the National Cattlemen’s Beef Association (NCBA) sent a letter to Terry Duffy, executive chairman and president for the CME Group, asking for changes that might fix high-frequency trading for the cattle futures market. Duffy took it upon himself to answer the call to action by meeting with cattle producers at the Cattle Industry Convention in San Diego on Friday.
“The elephant in the room is volatility,” Duffy told cattlemen during NCBA’s Cattle Marketing and International Trade Committee meeting.
How much volatility? Cattle futures have seen wide swings during the past few months. Take Thursday, Oct. 1, 2015. That day, the market opened around $123, jumped a dollar within minutes, and then fell back down. By 11 a.m., cattle futures were at $122 and then saw a steep decline to nearly $120. Just a half-hour later the markets had leveled back to $122. Finally at day's end, futures were hovering around the $120 mark.
The first hour and last hour of the day are historically the most active times for trading cattle.
However, despite the cattle industry's worries about high-frequency trading creating a roller coaster of a market, more than 80% of the trade volatility on Oct. 1 was carried out by manual, not high-frequency traders, according to CME Group data.
Traditionally, the cattle market sees limited high-frequency trading compared to other markets. The New York Stock Exchange has 80% of trade occurring by high-frequency traders. CME Group's other markets trade at 50% high frequency.
In contrast, cattle futures have just a 10% high-frequency trade incidence.
CME Group data indicates the majority of trade volatility occurred with manual traders, not high-frequency traders.
“We’re in a time period when the markets went extremely volatile,” noted CattleFax CEO Randy Blach during the annual CattleFax outlook. “... With or without high-frequency trading, we would still be at the same price levels. It’s just how we get there."
Cycle highs for cattle prices were reached in fall 2014, while cattle supply reached cycle lows in September 2014 to May 2015.
CME Group's Duffy also pointed to other factors at play. “We all know that cheap feed and heavier weights have dramatically increased the supply of the cattle market,” he said, pointing to a strong dollar, a slowing Chinese economy and food safety incidents as additional influences.
“Our goal is the same,” Duffy said. “Our goal is to have a vibrant cash market and futures market.”
To address these concerns, CME Group established a messaging policy as of Feb. 1 to limit high-frequency trading. CME Group takes a similar approach in other markets.
There are other tools available as well. Trading delays via circuit breakers could also be added to the cattle futures market. CME Group is also exploring the possibility of shorter trading hours to improve the liquidity of the market.
Terry Duffy (right), executive chairman and president for the CME Group, speaks to cattlemen during Cattle Marketing and International Trade Committee with NCBA chairmen Ed Greiman and Joe Kovanda.
“Spoofing,” an illegal practice where traders attempt to mislead the market and manipulate prices, “is not tolerated” by the CME Group, according to Duffy.
“There is nothing more important to the CME Group than the integrity of our marketplace,” he said. “We don’t look at dollars for today, we look at markets for tomorrow. That is what is important to us."
The discussions are likely to continue. “This is the start of what I think will be an ongoing dialogue with this industry,” said Julie Holzrichter, chief operating officer for CME Group.
Disagreements may occur between the two groups, but they always work towards making resolutions, said Ed Greiman, chairman for the Cattle Marketing and International Trade Committee. “The working relationship between NCBA and CME Group needs to stay the way it is. We need to keep this open dialogue,” Greiman said.