Twenty years ago, block trading of agricultural commodity futures never would have seen the light of day. There was no way the locals in the pit would have let block trades in corn or wheat or any of the other ag products happen. They would have demanded a piece of the action.
Markets sure don’t look like they did two decades ago, though, and on Monday, block trades – large, privately negotiated trades executed off the floor or electronic market but cleared by the exchange – were executed in hogs, Black Sea wheat and urea fertilizer. Tuesday saw some corn trade.
CME’s move is an attempt to attract volume to back month contracts and spreads, trading that has dropped off since screen trading became the norm rather than the exception.
“The high frequency models need liquidity and they need volume and that’s all done on the nearby contract,” Gary Sandlund, president of the brokerage Futures International, said. “The backend contracts that were once not illiquid, but not liquid enough to trade on a high frequency term, all of [the activity] vanished and now everything is just in the front end.”
The hope is that the big commercials in ags – the Cargills and Bunges of the world – will come in and start laying off risk. Sandlund said any attempt to put on the size those sorts of players would have needed in the former trading environment would have resulted in algorithms chasing up the order. So blocks will be good for the Cargills and Bunges but potentially bad for overall market transparency. Block trades are reported, but not for anywhere from 5 to 15 minutes after they are completed.
So what customer is really being favored? Is drumming up this new business actually detrimental to existing business? Is existing business bad business if its high frequency players can dictate so much? What balance of speculators and commercial participants is appropriate? Is CME losing its roots or actually trying to get back to its early days when it was geared to the producer?
Sandlund has been ready for this development for almost a decade. Futures International went under the umbrella of OTC Global Holdings, one of the largest energy brokers in the space, back in 2009, anticipating a sea change in grain trading similar to that undergone by the energy complex at that time.
“We bought this call seven or eight years too early,” Sandlund said.
Speaking of options, block trading is also allowed in futures options, but due to more prohibitive cost structures, Sandlund said options likely won’t see much volume.