Pit traders miss out on jump in Chicago volumes

Trading volumes on the world's benchmark grain and livestock markets soared as investors, allowed extended dealing hours, reacted to the US drought but the business did not spill over into live pit trading.

The CME Group, owner of exchanges including the Chicago Board of Trade, said that trading volumes in its agricultural commodities futures and options averaged 1.4m contracts per day last month, a jump of 46% on July last year.

The rise, in the first full month after electronic trading hours were extended to 21, reflected the surge in interest in US corn and soybean futures and options as drought fears sent yield expectations tumbling, and prices to record highs.

"Customers turned to CME Group to manage their risk associated with exceedingly dry and hot weather conditions in June and July," the company said, noting record volumes in soybean and soymeal contracts.

However, volumes in overall open outcry trading continued their long-term decline, falling 21% year-on-year to 1.05m, declining slightly faster than in June despite the grains rally and an extra trading day last month compared with July 2011.

Scream vs screen 

The declining trend in pit trading looks set to continue, "as volume shifts to deep and more liquid electronic markets", Richard Feltes, vice-president of Chicago-based broker RJ O'Brien, said.

"More people are trading electronically at home, or on their way into work, or around the globe."

A former Chicago floor trader, now a grains analyst, told that the arrival of near-round-the-clock electronic dealing had reduced the role of the pits in setting benchmark pricing levels, such as opening prices.

"You do not need someone to do market orders, to help you through that difficult opening hour," the source said.

However, open outcry trading in options will "hang in there longer than you think" given the ability of pit trading to match buyers and sellers for what can be complex and quirky deals.

Standout sector

Mr Feltes added that the overall increase in Chicago trading volumes was to be expected given the "most significant drought in 25 years, when we already have low US corn stocks".

Agricultural commodities looked especially appealing to investors given the weak returns that soft economic growth expectations were placing on many other assets.

"A market that has a real fundamental catalyst for price moves is going to attract a lot of interest," he said.

Phupinder Gill, the CME Group chief executive, said last week that "severe drought conditions in the Midwest, driving higher volatility, along with the expansion of the CBOT Grain and Oilseed trading hours on Globex had both
contributed to strong performance".

Pit closure

Separately on Thursday, the IntercontinentalExchange, which operates benchmark contracts in many soft commodities besides in energy, said that the electronic grain and oilseed contracts it set up as a challenge Chicago's dominance had traded 84,774 lots last month.

Last week, IntercontinentalExchange revealed that it is close its last trading pit, in options on futures in arabica coffee, raw sugar, cocoa, cotton and frozen concentrated orange juice.

These options will from October 22 be traded solely electronically.

"There has been an emphatic shift from floor to electronic execution in the options market, and as a market operator we have an obligation to respond," Ice said.

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