Block Trading Reduces Futures Transparency: Grain Traders

Block trading, a new type of activity allowed by the Commodity Futures Trading Commission, reduces transparency in agricultural futures markets, said a group of grain industry representatives at a CFTC Agricultural Advisory Committee meeting in Overland Park, Kan., last week.

According to “Investopedia,” a block trade “is an order or trade submitted for the sale or purchase of a large number of equities or bonds being traded at an arranged price between two parties, sometimes outside of the open markets, to lessen the impact on the security price.”

Because of the size of block trades, individual investors rarely, if ever make block trades, Investopedia added.  “In practice, these trades typically occur when significant hedge funds and institutional investors buy and sell large sums…in block trades via investment banks and other intermediaries.”

Block trading became available to crops and livestock futures markets in January, offering hedge funds, grain companies and others to trade “blocks” of futures and options contracts privately.  The idea is to make trading bulk quantities of these contracts more efficient and facilitate trading in some of the smaller markets.

 

PRIVATE VS PUBLIC

 

When futures contracts originated, the idea was to create a very public market where trades of contracts with specific obligations and sizes spelled out.  Such markets have been available for centuries, but it wasn’t until the advent of the clearing house that futures contracts could be traded this way.

That began the open pit, voice outcry system of trading futures contracts.  The system worked quite well until worldwide trading and computers became the norm, and electronic trading was born.

Computerized trading followed, along with algorithms and lightning-fast trading that left many producers feeling the price-discovery part of the futures market was getting away from them.

Now there is block trading, and many producers are feeling disenfranchised by a corporation fueled more by the desire for volume of trades, and thus more income, than by one that provides a viable hedging opportunity.

The complaint of some attending the CFTC Agricultural Advisory Committee meeting last week was that by definition, block trades were private and too large for producers to participate.

 

NBFA OBJECTS

 

Official notes of the discussions at the meeting were not kept, said Donna Faulk-White in the public affairs office of the CFTC.  However, the National Grain and Feed Association issued its own release of its comments to the commission.

“NGFA’s CFTC advisory committee representative Patrick Coyle, a commodity manager at COFCO International, Chicago, expressed concerns about whether block trades, which are privately negotiated and don’t appear in the CBOT central limit order book, remove liquidity from the contracts and reduce transparency and price discovery.

Coyle was concerned that block trades actually remove volume from the order book, and the CME responded that such a scenario was possible.

Apparently, there is reason to worry, an analyst said.

 

CATTLE, BEEF RECAP

 

Cattle sold Wednesday on the Livestock Exchange Video Auction at $117 per cwt, down $8.63 from two weeks earlier.

Cash trade was seen last week from $115 to $118 per cwt on a live basis, down $3.50 to $4 from the previous week.  Dressed-basis trading was light at $188 to $190, down $2 to $4.

The USDA’s choice cutout Monday was up $0.73 per cwt at $215.04, while select was off $2.46 at $203.14.  The choice/select spread widened to $11.90 from $8.71 with 63 loads of fabricated product sold into the spot market.

The CME Feeder Cattle index for the seven days ended Friday, was $134.49 per cwt, down $0.92.  This compares with Monday’s Apr settlement of $134.45, down $0.87.