CME Rolls Out Grain Pricing Changes Despite Protests

June 26th, 2012 by Trefis Team
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In an effort to reduce the confusion on closing prices for agricultural futures, CME Group’s (NASDAQ:CME) is set to introduce a new settlement methodology that will incorporate contract value from both floor trading and electronic trading venues to determine the closing prices for grain products. [1] The change in calculation methodology, first introduced on June 25, was met with vehement protests from floor traders on the Chicago Board of Trade (CBOT), who believe the move will result in a loss of jobs as the role of floor trading is downgraded. A group of traders has sued the exchange in an Illinois state court in Chicago to stop the adaptation of the new process.

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End of Days…

In the current scheme of things, an open outcry on the physical floor is the primary source for settling prices for agricultural futures. However, the volume of trade carried out electronically via fast computer programs is much higher than open cry trading as floor traders find it difficult to compete with high frequency trading algorithms. [2] A volume-weighted average price determination algorithm would greatly favor electronic trades, further discouraging the open cry trading.

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Electronic trading is set to continue to rise in the future as the CME group recently extended timings electronic trading for grain futures from 17 hours a day to 21 hours a day, in order to compete with who operate a 22 hour grain trade cycle (See CME Extends Trading Hours for Grains and Oilseeds To Attract More Customers)

…Or a New Beginning

Despite the legal hurdles in making the change, we believe the company is on the right track as electronic trade offers a greater scope to increase trade volumes. The recently introduced Short-Dated New Crop Corn options contracts saw record trade in the initial weeks. (See CME Impresses With Record First Day Trading Volumes For New Crop Options)

Our $285 price estimate on CME Group’s stock is about 10% above the current market price, as we expect the average daily volume of commodity contracts to rise over the next few years. You can gauge the impact of a change in our forecast by modifying the chart below.

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Notes:
  1. UPDATE: CME Presses On With Grain Pricing Changes Despite Lawsuit, Nasdaq, 25th June, 2012 [↩]
  2. CME GROUP VOLUME AND OPEN INTEREST REPORT 9:00 PM PRELIMINARY REPORT FOR BUSINESS DATE: 06/25/2012, CME Group, 25th June, 2012 [↩]