WASHINGTON, Feb. 3, 2016 - In the midst of a prolonged downturn in the cattle market, the industry’s largest producer group is taking action, hoping to address what it sees as some financial funny business in futures trading.
The board of the National Cattlemen’s Beef Association on Saturday approved a resolution calling for more oversight of the futures markets, specifically to address issues the group has with algorithmic and high frequency trading. Among other things, the resolution calls on the CME Group, which governs the futures markets, to “implement proactive procedures to more quickly identify, monitor, and address” what the group sees as troubling trading practices.
“This (futures trading) is a major risk management tool for cattle producers across the country, and as long as it works, it’s great,” Colin Woodall, NCBA’s vice president of government affairs, told Agri-Pulse. “But with the volatility we have seen … they can’t use it as an actual risk management tool, so we’ve got to fix that.”
The market analysis group CattleFax provided an example of that volatility. It said that since August, the live cattle market has seen six moves of more than $200 per head, each within 15 days of each other.
In January, NCBA leaders sent a letter to CME Group Executive Chairman and President Terry Duffy. In the letter, they expressed concern that the prevalence of high frequency trading, defined by the CME Group as one source sending more than two trading messages per second, was turning cattle futures contracts into “more of a liability than a benefit” due to market volatility.
In response, Duffy and other CME Group officials met with NCBA members at the Cattle Industry Convention in San Diego last week. They briefed producers on a breakdown that showed high frequency trading was actually only about 10 percent of the market, but Duffy acknowledged that unprecedented market volatility was the “elephant in the room.”
To help tame that elephant, Duffy said a new messaging policy for the live cattle futures contract was going into effect Feb. 1 along with similar policies for the feeder cattle and lean hog contracts. The policy will prevent trading on those contracts from exceeding certain volume ratios, potentially controlling some of the market volatility. He said the CME Group is also considering adding “circuit breakers,” or price fluctuation limits, on a contract within a set period of time, usually a few minutes. This would be in addition to limits already in place on how much a contract can fluctuate during a day’s trading.
Duffy said the length of the trading day may also come under scrutiny, saying that the cattle markets are open for too long every day. He pointed out that a good deal of activity happens during the first and last hours of the trading on the cattle contracts, and he thinks shortening the day would allow traders to “treat cattle like cattle and not cattle like Standard and Poor’s [S&P] 500 contracts.”
“I do believe that the hours are too long and that the volatility could be mitigated to some extent, outside of the fundamental reasons, if in fact you had more volume being traded in a shorter period of time,” Duffy told reporters last week.
For NCBA’s part, Woodall said the association is looking to form a working group that will analyze market data to address market volatility, and report back to the broader membership at meetings this summer. In the meantime, he said NCBA “will continue to ask for more information” on what the CME Group is doing to address the market roller coaster ride of the last few months.
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