Grain producers and other agricultural interests attending a public meeting in Kansas voiced their disapproval of a recent change in CME rules that allows block trades and cross trades in all of its agricultural futures and options.
At a meeting of the Commodity Futures Trading Commission's agricultural advisory committee held on April 5, representatives of farmers, ranchers, merchants and brokers spoke up about their concerns, which center on the fact that these trades do not take place within the order book. Instead two counterparties can negotiate price and quantity bilaterally before the execution takes place.
The agricultural interests complained that this type of trading threatens the transparency of CME's agricultural futures and harms the price discovery process by removing trading from open competition. Several participants also complained that this type of trading hurts smaller traders and brokers because it reduces the opportunity to get smaller trades filled.
“The feeling in the country is that there is one set of rules for people that do five lots and another set of rules for people that do 500 lots. You've created two different markets,” said Joe Barker, the president of CHS Hedging. Barker sits on the agricultural advisory committee as a representative of the National Council of Farmer Cooperatives.
CME officials defended the change in policy, giving a lengthy presentation on the reasons for introducing this type of trading. They explained that blocks and crosses allow CME's commercial customers to find the liquidity necessary to execute hedges in contract months where liquidity is relatively low. They also described the surveillance practices used to prevent misuse of this type of trading, and provided data showing that block and cross trades make up only a tiny percentage of the overall volume in agricultural futures and options.
The CME officials also emphasized that block trades actually encourage transparency because these trades must be reported to the exchange and disclosed to the entire marketplace within 15 minutes. The alternative is that hedgers will turn to the "dark market" for ag swaps, where this type of trading can take place without any transparency. "We want to bring these trades into the more transparent block market," they said.