"When people fear the government - that is tyranny; when government fears the people - that is liberty."
--- Thomas Jefferson
The Integrity of the Markets ... "Oh, Where have you gone?"
Since the merger of Chicago Mercantile Exchange and the Chicago Board of Trade,
the powers at the CME group have turned their backs on what has built Chicago into the trading center of the world:
Transparency, Liquidity, and Price Discovery.
After more than 150 years of trading agricultural commodity futures and options, the Chicago Mercantile and the CBOT products are threatened by the harmful impact of algorithms and program trading. Agricultural futures were created to allow producers to hedge against price fluctuations. Now these contracts are just pieces of a game called 'Catch me if you can.' Users of the actual agricultural products, (the farmers, producers and hedgers) put their orders into a battle of algorithms everyday standing by while programs out smart each other and diminish market quality. Initially, there was a lot of excitement about the electronic trading platform.We were led to believe there would be two venues that were fair, transparent and liquid. It is unfortunate for the farmers, producers and hedgers that all of the money has been invested into chasing the electronic customer. The commercials have gone elsewhere to seek risk management tools, and their absence is painfully evident. What happens during the next food crises? Who will be there to provide real markets? Who will restore the order? These are food products the world depends on. The agricultural commodity market is now a matching engine that forces the customer to invest capital with an unknown amount of risk.
Looking at a Globex electronic order book, the difference between the bid-ask spread is the lowest offer prices minus the highest bid price. This spread appears to be tight with large volume. But when you try to lift an offer or hit a bid, often times the volume disappears, and the spread adjusts off the market YOUR order has revealed.
Think you can use a stop order? SLAM-you are stopped out and look! The corn goes right back to where you bought them. How does the market know that? We feel that market data and information is either sold or given to the very trader that we are competing against. Collocation will be the last cannibalization of the agricultural products.
Liquidity is provided when the high frequency firms have a guaranteed profit. It tends to dry up when real markets are needed the most. What does intra-day mini-flash crash on Globex look like? Bids and offers disappear faster than a human can possibly adjust. What has happened to the real market makers? You know, the guys and gals that bid for a 200 lot of beans with BOTH HANDS and take the entire order? And if they did not fulfill their obligation, the trader was brought before a committee and disciplined with vigor. What happens to the electronic market maker with these tactics? He is rewarded with reduced trading fees. One or two algorithmic firms might get a well publicized fine, but this type of behavior is prevalent during all trading hours. The exchange established an Office of Investigations Committee and CME Market Regulation to oversee traders and audit trading. The integrity of the markets and the exchange were paramount to the success of the contracts. This honor was the life blood for every one of the participants involved.
The implied matching function has devastated the true spread market. The back end of the curve has fallen off a cliff as the first month receives most of the volume. When 90 spreads are traded, the belief is these orders are coming from the actual trading of the spread. However, the matching engine can pull pieces of orders from several different places and appear as the other side of and order. Is this true price discovery? Where is the market supposed to trade without implied orders creating bids and offers that are not really there?
The CME needs to obtain input from the professionals that actually use the markets including agricultural brokers and traders. The CME needs to respect and communicate with the sales force that represents the contracts. A committee needs to be created that represents these voices that have been stifled for too long. Can you stand by and watch the annihilation of the agricultural commodity markets? I cannot help but wonder if there were more people present, would the MF Global debacle have occurred? We have weathered these types of implosions in the past, and people with an understanding of the marketplace were able to quell the storm before it turned into a tsunami.
Furthermore, an independent committee needs to be created to oversee the Market Regulation and Global Operations Department. Prior to becoming a publicly traded company, we trusted the information coming from these departments. Now, the rewards, incentives and personal agendas have changed and the information given is one sided and difficult to obtain. We have repeated requested data comparing the closing volume of the pits and the screen and we have received nothing.
The REAL market makers that provided a sticky liquidity for hedging are forced into a closet. The traders that are still on the floor are competing with an arbitrage that doesn't exist. We have two illiquid markets. The volume is forced onto the screen into a marketplace that drives away orders. This is not a healthy market place. Using the Globex platform for settlement will only further drive the pricing of food into the hands of these HFTs. The CME group is only courting one kind of trader and their capital spending supports this theory. Innovation and support for the market intelligence and sales force that built this exchange and these products is non-existent. Recently, an exchange official proudly let us know that they replaced the light bulbs on the trading floor. We don't need new light bulbs because soon the lights will be off, and the world will wonder exactly who is determining the price of food.