The bucket list just got shorter today. Having been involved in the grain trade for 25 years, I've always had the desire to witness the activity on the floor in Chicago where grain price direction is determined, affecting commodity prices around the globe.
When the bell rang to open Monday's floor trading session at the Chicago Mercantile Exchange in Chicago, Chicago soft wheat futures opened 11 3/4 cents lower, corn opened 11 1/4 lower and soybeans opened 16 1/4 cents lower. This was not really what I'd hoped to see, as I was in the observation room watching the action. I'm currently in Chicago as a part of the DTN/The Progressive Farmer's annual Ag Summit, where 650 attendees from the U.S. and Canada are meeting. The conference is titled Agriculture 2.0, Business Intelligence for Tomorrow's Farms.
Of course the floor trade at the 164-year-old institution isn't what it once was. The CME's electronic Globex trading system now accounts for roughly 90% of the exchange's activity. While futures trading on the floor have faced a sharp decline, option trading has held tightly to the open-outcry method of trading, as it was suggested there could be up to 1,400 variables involved with a complex option trade, with the complexity of this type of order being easier to transact in the pit than electronically.
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A harsh example of how electronic-trade has affected the floor trade was seen in the euro-dollar pit. This is actually an interest rate product which determines rates for U.S. investments outside of the country. At one time there would have been as many as 800 players in the pit, while this morning the pit was virtually empty.
Electronic trade has allowed the CME to create a trade in 15 one-thousands of a second. Their introductory video suggested that the electronic signal carrying trade information can circle the planet four times within a second. The dollar values of the total CME trades are also staggering -- two billion trades a year totaling some 1,000 trillion dollars. The membership required to trade one commodity on the floor ranges from a low of $4,500 to trade just a single commodity to a high well in excess of $400,000 required to trade a multitude of commodities.
The exchange is committed to maintaining the floor trade as long as there is demand for the service. While the notion that the floor trade would be abolished in time has appeared and re-appeared over the years, no long-term decisions have been made about the future of the floor trade for agriculture futures.
One point of interest is that most floor traders utilized computer tablets, something that didn't even exist a few short years ago, and also trade electronically while in the pit. A floor trader may find himself buying or going long on the floor trade while placing the opposite order by going short or selling in the electronic trade in order to arbitrage opportunities across the two markets.
With the introduction of electronic trade for agricultural futures in 2006, the ability to spread trade over a longer day has been realized, with current electronic trade for ag futures on the Globex platform starting at 5 p.m. central time and ending at 2 p.m. central time, a 21-hour day. This allows the market to adjust to global events on a more timely fashion, with the downside being that volume is spread over a longer day which provides less action. We were told that typical ag commodity action is seen at the open and the close, while the hours in between can get "sleepy."
It was a treat to see this institution before inevitable change and ongoing technological advances impact its viability.
More on the conference to follow....
Cliff Jamieson can be reached at firstname.lastname@example.org
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