While at the National Grain and Feed Association’s annual conference this week, I had the opportunity to speak with commercial grain market participants, some of whom had concerns about our plan to reduce grain-trading hours. Others were ecstatic about the changes. This was much like what we frequently see across CME Group’s diverse, global customers. Our decision-making process must involve tradeoffs between diverse client points of view – electronic traders and floor traders, commercial traders and financial traders, domestic customers and international customers.
The reality is if we were “in the bag” for any one segment, decisions would be simple. However, our primary objective remains preserving the health and integrity of our deep and liquid markets, while finding the right balance that ensures our products continue to be effective risk-management tools for all of our customers over the long term.
At the heart of ensuring healthy and effective markets is maintaining a marketplace that attracts a diverse pool of participants, both from a user and liquidity provider standpoint. What keeps me up at night is the concern that we lose our diverse pool of market participants and our market becomes the domain of only a few. To ensure that doesn’t happen, we must continue to provide a balance between grain hedgers, who are our primary purpose for being in business, with those of our liquidity providers, whose trading activity enables users to hedge significant quantities of grains in the most cost-effective manner possible.
Within the liquidity providers we seek to maintain a diverse population as well. There are some key roles for larger, more automated market makers – ensuring tight and deep bids and offers across a widening range of options product and across hundreds of strike prices for example. At the same time, smaller point-and-click and floor-based market makers are still a very important part of the liquidity pool. This diversity is what makes our markets the effective risk management venue that they are.
As it relates to our decision to reduce grain trading hours, in late 2012 we heard from the majority of our customers that the extended hours we had implemented earlier in the year were not meeting their needs. In particular, our liquidity providers told us that the longer hours were straining their ability to provide the market depth they had in the past. We constantly monitor a wide variety of factors around our markets and had quantitative evidence to support this feedback.
We took this feedback seriously and decided to reach out to a broader subset of our customer base to determine if our trading hours were still meeting their needs. To do this we engaged a broad cross section of our customers through a survey, focus groups and a series of one-on-one conversations.
The key takeaway from this outreach effort was that the majority of our customers wanted shorter grain and oilseed trading hours. Beyond this basic view, and a strong sense the market wanted to return to a 1:15 p.m. CT close, there was not clear agreement about what the specific hours should be. For example, here is some of the feedback we received about how best to reposition the morning hours:
- There was strong support for a break during the morning. It was suggested this provided structure to the market and built liquidity on the open, which allowed people the opportunity to execute larger trades.
- A good number who took the survey suggested returning to the 2-hour, 15-minute morning break between 7:15-9:30 a.m. CT.
- Others, including smaller country elevators, were against any break as they wanted access to the market during the morning hours.
- Independent market makers, including the floor-based community, suggested that a shorter break would make sense, but there were diverging opinions as to when it should occur.
- Some told us it was important to be open at 7:30 a.m. CT when some minor weekly agricultural reports come out.
- Others suggested a break between 8:00-9:00 a.m. CT.
- Almost everyone pointed out that being open in the morning was more important as there was more market news and our European customers were in the middle of their trading day.
Eventually, we decided on a 7:45-8:30 a.m. CT window as a balance between all of these conflicting customer desires. Is it a perfect answer for every customer’s individual needs? No. But we believe it’s a solution that strikes a reasonable balance based on the 4,000+ responses to our survey and countless other customer conversations. While some may disagree with the end result, these decisions were made based on one of the most widespread outreaches to our diverse customer base – a process we hope we can replicate for future issues impacting our industry. After all, managing risk is about finding the right balance.