PR Log - Jun 26, 2012 - Today 24 Agricultural professionals from the non-profit Protect Ag Futures, Inc. at the Chicago Board of Trade filed a lawsuit against the Chicago Board of Trade and CME Group in Cook County court, seeking to block any changes would diminish or eliminate the role rational human beings in determining the prices of food.
Protect Ag Futures, www.protectAgfutures.com believes that after several meetings with the exchange, including CME Group Executive Chairman Terry Duffy and high management officials, that they have been lied to, ignored and disrespected. It is their professional opinion that fundamental participants of these markets do not want the CBOT/CME Group to implement this change in settlement methodology because it will swiftly lead to domination of the markets by high frequency traders and algorithm traders. These beliefs have been corroborated by taking surveys of farmers and commercial firms (fundamental participants). The farmers and commercial firms have also written letters to CME Group upper management. Terry Duffy told PAG in a meeting that “the customer letters don’t matter”. Please see survey results from over 500 farmers, end users, coops and hedgers: http://www.savethefloor.com/protectAgfutures/survey.php PAG has also submitted the letters to the CFTC. Filing an injunction against the exchange to stop the new settlement method was the only recourse left in light of repeatedly being ignored. There was no public comment period as there have been in the past to gauge customer sentiment on certain exchange policy changes.
PAG is also very concerned about the exchange’s backup plan in the event of a cyber-attack or technical glitch. The Globex trading platform has already experienced technical glitches in the crude oil futures market which caused a halt in trading and the exchange was forced to find actual traders to go to the floor to make markets and settle contracts. It is the professional opinion of PAG that that is not an acceptable backup plan. If the trading floor is eliminated because of the new settlement methodology, it seems there would be unlimited risk should the Globex platform experience any problems.
The CBOT 10 directors of the board of CME Group unanimously rejected this new settlement methodology when it was put before them to vote. Their concerns were that it would be negative for the business of the corporation and negative for the business opportunities of the membership. PAG believes that the CBOT 10 directors were voting in the best interest of the exchange and the welfare of the marketplace. CME Group went against this vote immediately following the end of the voting rights period of the CBOT 10 PAG believes the vote of the CBOT 10 should have stood.
CME Group claims that the change in settlement method is being mandated by the CFTC, but PAG has reviewed letters from the CFTC that merely request the CME Group to demonstrate that they are not in violation of certain core principles of the Commodity Exchange Act. It was not a directive or an order. The CME is self-regulated and routinely makes its own policy decisions, such as increasing trading hours to compete with the Intercontinental Exchange. The CME Group has decided to go against the wishes of thousands of its core customers and market participants and institutes a policy that will directly benefit the source of its biggest revenue stream: high frequency traders.
It is the belief of PAG that grain and livestock markets are delicate hedging instruments that should be handled at the speed of human thought, not with super-computers on auto pilot and algorithms competing with each other and distorting or manipulating the benchmark prices of food for the world. PAG believes there certainly is a positive role that the computers play, brokers and traders use them every day. The settlement method CME Group plans to implement will swiftly lead to domination of the markets by high frequency traders and algo traders. The HFT’s are not yet registered with the CFTC and in many cases aren’t regulated by any governmental authority or agency. This is alarming, but especially so when dealing with markets that feed and fuel the world. Our grave concern is the radical distortion of prices and the loss of a hedging instrument that has been the standard for over 150 years.
This ‘in and out’ model is something that drives the exchange because it generates many, many fees and pumps up volume which translates into a higher stock price. The exchange is facing a huge conflict of interest: market efficiency vs. share holder stock price. The fact is that the ALGO and HFT traders do not have a STAKE in the overall health and integrity of the market. They wait for the ‘real money’ participants (market makers who capitalize the markets with their own money, hold positions and offset risk) to pick off and flush through their orders. This is a predatory process that is based on a model that is not based on true price discovery. Agricultural trading is devolving into a platform that is not relevant in Agricultural commodity hedging because the two vital components are greatly diminished:
1. PRICE DISCOVERY 2. RISK TRANSFER = Unable to hedge forward
Speculative opportunity and depth of market place has been compromised. The HFT’s have turned the Ag futures into “Nintendo Trading” with no concern for the underlying product. There is potential for MORE illegal activity. Transparency, price discovery and risk transfer have been severely compromised. Many of the commercials that use our markets are finding it harder to compete as technology costs outstrip efficiency. This has cost commercials substantial investments in order management and front end/electronic platforms.
According to Joe Saluzzi, author of “Broken Markets” and partner in Themis Trading, “Computers are important tools in trading and finance, but that’s all they are – tools. The more we forget that, and rely on them to replace professional, rationally-minded, thinking human beings, the more we are jeopardizing the whole system.”
The thought process, hedging and flow of information that is integral to the agricultural futures commodity hedging and trading are virtually gone. Eliminated are the people that provide INTELLIGENT liquidity that helps markets function efficiently. Intelligence is now found through programmed trading which is ARTIFICIAL. The integrity of the physical commodity market is supposed to be supported by a flow of real information and market intelligence, and that is disappearing because key market participants are forced out of the marketplace