Lean Hogs Jump- Computerized Trading Ruining Marketplace

The Lean Hogs futures at $CME jumped 157.5 points on one trade on the screen. At 9:15 am CT, the market was trading .7570, the next published trade was .7727. Just to let you know how much money that is, it’s $4 per one lot (or $4×170 points x1 conract=$680). If you look at time and sales, it shows that trades happened between the two prices. However, the move happened faster than one could blink an eye.  (a limit up or down move in the hogs is 300 points from the previous day’s settlement)

In the time and sales data we pulled off CQG, the market traded .7672, next print is .7740 bid! Then the market doesn’t actually trade, but is bid and offered from .7740 to .7735, and the high is .7727.

We called CME GLOBEX and they said that it was a stop at .7570 and only 250 contracts traded. I was watching the market at the time, about to enter an order and saw it trade .7570 a couple of times.  The CME GLOBEX explanation isn’t kosher with what was happening on the screen.

Meanwhile, in the actual pit there were resting orders above the market that didn’t get filled.  The pit has a high of .7705.  The only reason it went that high was arbitrageurs were able to sell the screen and buy the pit.  If you were a hedger and had an order in the pit-you may or may not have gotten your hedge off.  Order fillers and locals are shaking their heads.  They used to make sure that the market was orderly.

This would never happen if there were actual human intervention in the market.  The hog market at CME is broken, and I wouldn’t trade it if I were you.  I would also avoid other thinly traded commodity markets.  This is not the first time something like this has happened in electronically traded commodity futures markets.  It is happening with more and more regularity.

The futures markets have embraced electronic trading. In general, it’s a good development. But applying the same solution to every futures market is not efficient. It’s akin to being a big government program. The CME is treating markets no different than a faceless government bureaucrat. Supposedly, private industry is supposed to be more flexible than that.

The hog market at the CME is broken and I would encourage people not to trade it. But, this is the same story that has happened across the board in many thinly traded commodity markets as they have transitioned to electronic trading.

Over at the $ICE, the coffee market and the cocoa market were destroyed by electronic trading.  Traders have left the market.  Hedgers are using privately negotiated contracts to hedge the crop.  Volume has increased, but it’s merely high frequency traders pushing markets up and down.  It’s no different in the ag markets at CME.

At $NYX European exchange LIFFE, the cocoa market has been manipulated by electronic trading. The problem is not too much speculation, the problem is the way the exchanges handle that speculation.

At NYMEX, the natural gas market is run up and down every day.  At the CBOT, traders have had trouble in the more thinly traded grain markets.  I know more traders leaving the marketplace than rushing to join.  That’s odd given the big bull market in commodities.

The pure volume numbers on contracts look good.  But looking at volume is missing the bigger picture.  Exchange personnel slap themselves on the back over increased volume. But the only people that had anything to do with it were the tech staffs that increased the robustness of the systems.

Why do these markets exist?  They exist so hedgers can manage their risk.  The guy that has a coffee plantation or a hog farm can’t get the size off at any one price anymore.  Many traders have left the market, leaving it to the electronic algo traders to make markets.  Groups like Susquehanna have said they will no longer make a market in many out of the money option contracts because they get picked off continually.

A lot of the exchange management teams have little knowledge about what makes a marketplace.  They have business degrees, but no practical experience in actual market participation.  At CME, they never have had a focus group of actual traders in agricultural markets to solicit input.  Management is not that much different than the actual person on the street, they have no idea why traders do what they do.

When I was on the CME Board at demutualization (2001), we worried about turning over a lot of functions to management. Management in its narrative upon going public (2003) pilloried the old membership, and distrusts it to this day.  Management was supposed to hold regular focus group meetings with market participants to understand the market. This has never happened since CME became publicly traded.

Electronic trading in thinly traded commodities is a total bust.  Markets like cocoa, coffee, hogs, cattle, oats, rice, and natural gas have been destroyed by electronic trading.  The problem is that there is no actual volume on the bid/ask spread.  This hurts hedgers. They pay more for their risk management.  They are leaving the market.  The volatility and moves are just too violent to use the listed futures markets as an efficient vehicle for hedging.

Killing the hedgers filters down into the real prices that the public pays for these commodities. Premiums go up, because of the increased cost to manage and hedge risk.  Combine that with the artificial cost increase caused by Dodd-Frank and prices go up artificially.  Prices don’t go up because of actual supply and demand market conditions.  Try to lock in a natural gas price with your utility company and see how much of a premium you will pay.

Recall, hedging and risk management is why the contracts exist in the first place.  In 1849, the CBOT wasn’t started so a bunch of people could make money. It was started so producers and suppliers could preserve their money.

Taking a look at seat prices, you see the evidence that the market is broken.  The public looks at share prices of $CME, $ICE, and $NYX.  But if you want to find out if people are really making money or not, check out the B share seat prices at CME, CBOT and NYMEX.  Lease prices are also down significantly.

The CME B-1 membership was worth $1.2 Million last year.  This year, the last trade is $532,000.  Lease prices were over $2000/mo last year, now $1500.  This is the real health of the participants in the market.  CME management has ignored B share value.  The reason for that is that CME management sees a trade off in value between the publicly traded A share, and the privately traded B share.

Is eliminating electronic trading the best solution to thinly traded commodity markets?  In the very short term, it might be.  In the long term there needs to be an actual hybrid solution brought to the market. The solution that CME now calls a hybrid is not a solution today.  Instead, there are two separate marketplaces trading the exact same contract competing with each other.  This is far different than a marketplace like the emini S+P.

The technology is there to transmit orders electronically to an open outcry pit, and have orders executed-and electronically reported back to customers.  Meanwhile, the market gets the best of both worlds; the rationality of open outcry trading, plus the efficiency and speed of electronic trading.

If the exchanges don’t change, pretty soon there will be 20-30 traders controlling the entire publicly listed marketplace.  Their marketplace will be irrelevant. The real market will be in the underground OTC market.  Not a lot different than dark pools of liquidity and the stock market today.

UPDATE

I should add that every night when the large hedgers and big traders are in bed, computerized fund trading bids the hog market up every night. Usually from 2:30 am to 7am CT, the market rises .05 to .90 points. Doesn’t matter if the cash market is lower or not.  This influences traders positions-even if at expiration the cash and futures merge.  Markets can remain irrational longer than participants can remain solvent. In futures markets that is exacerbated because of margin.

For the record, CME management will say that I have sour grapes because I may or may have not lost money on this move.  I didn’t make or lose money on it. I was in fact trying to enter an order to buy at .7570, but was only looking to scalp a few ticks out of the market.  Not 150!  As a trader, you get used to missing trades and markets.  That’s not a big deal. Exchange managements have fallen down on their “caretaker of the marketplace function”. I also do not own a B share at CME, but do own A shares. I owned a B share from 1988-2010.  If mgmt and others are ticked at me, fine-I also write a lot of positive stuff on CME too.  Check the record.  I also would invite people that agree or disagree with me not to email me, but leave your comments in the comment section.  There are private listserves that traders may feel compelled to comment on, I would suggest you leave your comments here. The public needs to know.

UPDATE

over at seeking alpha, I was sent this.

welcome Silicon Investor readers.

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  • Dhill

    Excellent description of what is happening with commodity futures when traded electronically. It may not be tomorrow or even next year but cattle hogs corn wheat and oil futures will go by the wayside as the CME continues to destroy the trading community that built these products

  • Lschulman

    the reason that B shares are declining is that the CME and other electronic exchanges are getting closer to pricing their products based on volume and value added rather than on whether the customer is also a shareholder. This makes sense because it enables the for profit exchanges to maximize their revenue via price discrimination. the only value of the B share is the discount that it conveys on its holder.

    • Also clearing.

      • Michaelspina01

        Jeff,

        I think it is comical to accuse HFT firms of wrong doing by “quote stuffing” and “order sniffing” when these exact same things were done by traders in the pit. Are you claiming that locals never bid or offered for positions they didn’t want in order to influence the market? Or that they never put upticks/downtick in to attempt to initiate stops. Or that in times of uncertainty they widened their markets? Or are you acknowledging that those things happened in the pit as well and that they were improper then as well?

        • Ag trader

          Michael,

          In the pit, if you were to bid for 500 and someone said sold, you were wearing them. That scenario actually occurred more than you would think. If you attempted to weasel your way out of that trade more than once, you got labeled as being untrustworthy (to put it nicely). Today, in many, if not most cases, it is not even possible to hit certain bids or offers on the screen. Just reference the Jan/March soybean spread book on any given day. Using today as an example, there was 109,000 spreads bid for at 10 under, and 95,000 offered at 9 3/4 under. Take a look at open interest in Jan and March soybeans, and you will see that both sides of the spread book are fantasy. They are fake bids that get canned when they get a certain % filled. You literally cannot hit most of these large bids & offers in the books, because they are generated by an algo that yanks the order when it hits a fill number. So to equate what took place in the past in the pit with what takes place today on the screen is either disingenuous or just belies a pre-existing bias against the pit.
          There’s nothing comical about this, and I am not advocating the curtailment of technology as it is applied to markets. It is just very obvious that the electronic market is being consistently gamed by parties that have no intention of trading their bids & offers, and that works against the integrity and to the detriment of the markets.

          • Michaelspina01

            Agtrader,

            I was originally a pit trader and I know for a fact that the amount of times someone honored an oversized bid/offer was far smaller than the amount of times they honored them. Furthermore, brokers routinely tipped off traders in the pit by offering large quantity market orders in between the bid/ask spread to give traders a heads up that their bid/offer was about to get hit/lifted thereby giving them the opportunity to adjust.

            Addressing your example in the Soybeans spreads, the reason that occurs is because the matching algo is partially prorata. If you post a larger size you get a larger percentage of what trades. The fact of the matter is if there is 100,000 on the bid and you have 100,000 to sell you can hit that bid and you will be filled.

            I don’t have a bias for the pit or the screen. However, to say that the pit was some holy place where traders had the best interests of the market as a whole in mind is really a fantasy.

          • Ag trader

            I do not see anything in my post that says or implies the pit being sacrosanct. As I stated before, I like having the screen to trade on. But we’re almost 5 years down the road of the screen having primacy, I don’t think it is too much to ask that the screen stop providing an avenue for the market as a whole to get gamed.
            As for the spreads comment, yes, the algo runs on a partial pro-rata basis, and therein lies the rub. The numbers that participants see are fake, untradeable. You are wrong about hitting those 100,000 lots and getting them all (not that any participant is even able to enter such an order). As I said before, many of the large lots in the market are algo-generated orders, designed to automatically cancel when they reach a pre-determined clip size. I have covered this ground forensically with CME staff.

          • Michaelspina01

            My point is that the market was being gamed when all of the volume was in the pit. Now it is being gamed in a different manner by other players.

            Just to be clear about what I am saying about hitting a 100,000 lot bid in a market if you see a bid for 100,000 and you enter an order to sell 100,000 your order will be filled. If you enter an order to sell 5000 then the algos will have a chance to react and some, or even all, of what is left on the bid may get cancelled.

          • That is a good point and a function of how the exchange has decided to allocate trades. Buy using an allocation algorithm that allocates by how many you have bid or offered, it encourages larger shown size-without actually being there. Machines are so fast they can cancel it before it gets filled, humans cannot.

            Would a FIFO system be better for the market? Or certain markets? In eurodollars the allocation algo was popular. Not sure about today. If I am first, I want them all until I’m filled. Make the other guys pay up. However, then your back to a speed issue. No easy answers here.

        • The rest of the pit could keep them honest since trade was in slow motion compared to electronic trading. Happens so fast now you don’t know it.

          Plus, if a local kept it up, they’d get caught, fined, and then booted out.

  • Anonymous

    Oh COME ON … if you’ve been at this since 1988, and have done what you’ve said you’ve done with the CME … then you know that those sort of opens are QUITE common. Incredibly common. Insanely common. I could cite hundreds of examples, if not thousands.

    • you can cite volatile markets. But you can cite a market where a small amount of contracts moved the market 170 points. They are becoming more and more common in thinly traded commodity markets.

      Volume in the hogs before screen trading was around 10k per day. Now its 20k with more volatility and more big moves. Plus it ignores the underlying cash market.

      Market is broken.

  • Anonymous

    I’ve been an upstairs guy for a long time. Most of my business has been smallish to medium sized speculators. On balance I’d say the move from pit to screen has been a plus for my clientele. In my subjective opinion I find there’s less slippage on fills (much of the time) than there was when orders went to the floor. I don’t have to wait for hours to find out fill prices or whether a cancel is confirmed out. There’s no waiting for a half hour to find out fill prices for grain orders from the open. Were the coffee or cocoa futures market a better hedge vehicle when they were pit traded?

    I’m not sure if I’m responding to the issue you’re raising – I don’t know whether the move to the screen has hurt the viability of futures as an efficient hedging and true price discovery vehicle. I think the evidence of my experience says that the move to the screen has done much to level the playing field for smaller spec traders.

    Last thing-I’m not saying this to start an argument; I’m not a big follower of exchange policy and direction so I don’t know. Do you think the exchanges were better custodians of shareholder value when the markets were still predominantly pit traded? Have they fallen down on the way to the screen?

    • I think that when the pit was ruled by humans, there was peer pressure and other conventions to keep markets honest. Sure, there were always nefarious characters. However, the event that happened today would have never happened in a pit.

      Exchanges need to rethink how they use technology to interact with markets. Today, HFT firms can use quote stuffing, order sniffers to run stops. No different than the illegal practices of some traders in the old days. Yes, I am calling a spade a spade-HFT and algo firms deliberately write programs to do illegal things in the market. No surprise there. They are unchecked by exchanges, who don’t understand or don’t care because they want the volume.

      As I said on your blog, I think slippage of 170 points on a 250 car stop order in the hogs is criminal. Would never have happened in the open outcry pit. Customers got screwed.

      At the end of the day, the thinly traded markets will look like the Pork Belly Contract. Do you have a lot of customers clamoring to trade there?

  • “Groups like Susquehanna have said they will no longer make a market in many out of the money option contracts because they get picked off continually.”

    Is there a publicly available source on this?

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  • cowhedger

    As a 25 yr hedger and speculator there has never been a time in history where livestock and grain futures market access has been better, the markerts more deep, bid/ask been more transparent and tight. Until you have actually been involved in the cash markets and used the ag futures and options to hedge you may not appreciate what incredible markets we have today with 23 hr electronic trading.

    One last comment. If you don’t believe these markets were developed in 1849 so a bunch of people could make money you have never sat down with a banker to get an ag loan.

  • Houdini

    The S&Ps (equity futures) are suffering a similar fate in proportion to the size and scope of the mkt. Fewer and fewer players making money running prices up and down. The volume is hollow.

  • Ag trader

    I have been a trader at CBOT, CBOE, and now am back at CBOT/CME. I have been trading since 1987. While I am in agreement with some of the comments about the market never being better, there are also some glaring problems that, if the CME had some balance in their approach to managing business, could be easily addressed. For one, why does the exchange allow obviously phony orders that have no intention of trading, to be submitted up and down the order book in the pre-market timeframe? If you are a user of CME markets, you know what I am referring to. Electronic prop shops post huge bids and offers all the way up and down the waterfall every morning and evening, in order to check out the electronic order book. It is analogous to asking a broker what orders he has in his deck, and having him divulge to you all of his customer orders. It is a clear violation of the integrity of the market, and the CME knows about it and allows it to continue. I have personally talked to staff many times about this problem, to no avail. They just don’t care about anything other than volume, volume, volume. The newest trick in the ag markets takes place on report mornings. On the morning of USDA S&D reports, as soon as the overnight session ends at 7:15, electronic prop guys load the books with limit-up bids in the biggest size their firm will allow. This puts them at the head of the line on the open. They then wait to see what the reaction is to the report at 7:30. If it is bullish, they leave their orders in, and on a lock-limit open, they might get a percentage of their order filled. They then go to the option pit to see how high the synthetic is trading, and lock in a risk-free gain. I say risk free because if there is any indication that the report is not wildly bullish, they cancel their huge bid seconds before the 30-second lockout, leaving the market to scramble for what price is in balance to open the market. It’s complete gaming of the system. It worked for several of them 2 reports ago, and there was a whole bandwagon of new guys doing it on the last report. CME does nothing about this blatant attempt to manipulate markets, because the electronic props contribute so much to volume figures.
    This is not sour grapes, as I love the screen-trading markets. I mean, NO ONE would have paid the crazy prices for spread and flat-price positions in the pit in the old days that these customers get drilled with nowadays. My worry, however, is for the future. Someday, interest rates will go back up, and focus will shift out of ags. When that day comes, these electronic prop guys will move on in a second, and with the commercials like Cargill and ADM not using the markets as much, and with burned-customers having quit it long ago, CME will be left with a bunch of dead contracts with no volume. The ag markets are being set up for their own destruction.

    • Now there is another new phenomena that was never contemplated when computerized trading began. Thanks for the comment, keep them coming. I had heard of quote stuffing, sniffer algos etc, but never that practice.

      That would never have happened in a pit, a local or order filler would have kept the market honest. That is pure gaming the system.

  • SVS

    Another question to ask is who can see the entire book? Stops, icebergs, etc. There is no doubt that programs have been written that can hack the exchange security blocks. The smaller markets are where such people would be able to profit the most and that is why we will continue to see these wild swings on a regular basis.

  • Leaper1009

    i say keep the comuter but have hrs like 830am-4pm, no overnight trading!

  • Leaper1009

    i say keep the comuter but have hrs like 830am-4pm, no overnight trading!

  • Ruven77

    Jeff,

    I am off the floor after almost 30 years there. I can’t say I enjoy the screens but I don’t like the weather either and have the courtesy only to say so when I am asked. But since you asked…

    Surely, you must be kidding to suggest that “The order fillers would not allow” uncalled for market action. Once again, either you or I must have been trading on different exchanges called the CME, living on different planets called Earth, and in different Universes. The control of the paper flow not only wasn’t ‘moderated or controlled’ by the filling brokers it was held up regularly like the Pony Express going thru the Badlands in South Dakota at dawn.

    Get serious. The pit was a seething pot of nepotism, cronyism, and downright thievery, a jungle of ‘I got mine, so go f$$$ yourself’ (Not that there is anything wrong with a little friendly rivalry. )

    As to you claim of manipulation – you were not in the meat pits in the ‘good old days’ so perhaps you don’t remember when a market would apparently trade 15 or 50 contracts at a limit price in the pit and the next day one could see that 1500 cleared there? Yep! Your order fillers didn’t allow a disorderly market where everyone might get a shot at the order flow so they passed out the fills to there buddies back at the desk. Similar things went on in the ED and every other pit on a regular basis.

    I don’t remember it being a level playing field in the ED pit when a guy (like you) who is 7 feet tall got all the trades that another trader who may have been bidding first and longer but was only 5’2″ (like me) got nothing. Where was your outrage then??? Huh???!!!

    Now as to your disorderly Hog market:
    I don’t know what report came out but these are the numbers off my charts

    At 9:05 -> 9:09:59 Pit L 7520 H 7530 C 7530
    Scr L 7520 H 7540 C 7535

    at 9:10 -> 9:14:59 Pit L 7540 H 7560 C 7560
    Scr L 7532 H7570 C 7567

    at 9:15 -> 9:19:59 Pit L 7625 H7705 C 7625
    Scr L 7567 H7727 C 7630

    Aside from this perhaps being a tempest in a teapot it appears, though we cannot say for sure, that the trade on the screen is more continuous than that in the pit, at least the chart shows such. The pit show wider gaps between bars. Markets move. Uuuhh! That’s why we trade them.

    I suggest, you are pissed because you missed a trade. I miss trades all the time, usually because I am too old, too timid, or too stupid (or wise) to jump at an opportunity. You know what I do? I MOVE ON TO THE NEXT TRADE instead of telling the world how screwed up the market is.

    ‘With great power comes great responsibility.’ YOur blog gives you power to speak to people who don’t know you and don’t know anything about the markets and certainly less that the guys running the place. I believe you do no service to anyone, least of all yourself by this particular post. You risk turning into one of those media jags who spend their time looking for the smallest flaw in our great nation for the sake of a sensationalist headline or lead in regardless of how misleading the story is to the actual facts.

    The fact are that there was a fast opening 15 minutes in the Hog market that day. You know for 25 years I have been bombarding Board Members and Management with various suggestions about how they might improve the functioning of the CME. For the most part, I think they totally ignore me. Recently I sent off an email to some very high ups that I was worried about the exposure to a rumored huge position by one institution on one of our markets. They sent me a “Don’t worry. Be happy.” reply, which was more than I expected.
    But I am not going around telling every one to stop using this or that market. No one else called it ‘sour grapes’ but you. A worthwhile literary tactic to name the flaw and thus by implication deny it. I leave that for the rest of the readers.

    Can the system be improved? Yes!
    Did (prior) management throw out the baby with the bath water when they disbanded ALL the member populated committees? Yes!
    Would I like to see more trader input into market design and oversight? Yes!
    Can and should current management announce to the world that it is now seeking the ‘aid’ of its members to manage its operations? Not so sure. With a high profile public company like the CME and picayune critics out there reaching down their pants and blogging about every little dingle-berry, maybe it is harder to make that transition that we might think.

    To borrow a phrase, “It is the worst of all exchanges except for all the others.”

    MYLINT

    • Were pits perfect? No. Am I advocating for them to do 100% of the business again? No. But the way the current market is structured technologically in thinly traded markets like coffee, cocoa, orange juice, nat. gas, hogs, rice, oats is hurting the market. In the long run, most hedgers will find it cheaper to go to the OTC market to hedge. That’s why the markets supposedly exist.

      These thinly traded markets cannot be pushed through the same electronic hole that worldwide 24 hour markets like financial markets are. Eventually, you will hurt the market.

      I was in the Eurodollar pit for years. While markets got volatile, and their was favoritism and bagmen-the market remained orderly. A 170 point move on a 250 car stop order is not anywhere near orderly. The data I received later showed stops were set off all the way up and for the entire move, 1673 contracts traded in less than one minutes time.

      I was in the hog pit from 2003-2010, and traded it briefly in 1996-1998. The market moved, but I only saw it move once like that(near a close in 2006). This is happening with more regularity.

      The screen based trading isn’t the problem per se. But, the HFT and algo firms exploit the electronic system every bit as much as the bagman of old. If you think they are pure, I have a bridge to sell you in Brooklyn. Quote stuffing, sniffer programs, and other practices are programmed in with increasing regularity. Because of co-location, they have a speed advantage not available to other full paying members (supposed peers)

      Exchanges have a responsibility to the marketplace. In the old days, they used a committee system that managed markets. Now, there is no committee-it falls on the exchange itself. Exchanges need to tailor technology to meld correctly with different marketplaces. You are experienced enough to know that one market isn’t just like another.

      In the case of thinly traded markets, they ought to consider some significant changes. Development of new technology to interface with the market-and limits on what HFT and algo traders can do. Other commenters have talked about iceberg orders, stuff trading away from the market that they don’t have a shot at. Short term, there might be volume. Long term they risk harming the entire marketplace. Take a walk by the pork bellies and look at volume and open interest. Or better yet, check out the onion market.

      • Michaelspina01

        Jeff,

        You can’t compare volatility in the Eurodollar contract years ago with volatility in the Hogs now. The two products are so different that it adds nothing to the discussion. Just because you can point to isolated incidents of abnormal volatility in thinly traded electronic markets doesn’t mean that the pit over the course of many sessions would have provided hedgers, or amyone else for that matter, with a more liquid market. I would argue the opposite. For the most part markets are more transparent and liquid now than when they were primarily pit traded. Add that to the fact that allocation of trades is done in a fair manner that all market participants are aware of, not because I am the brokers brother-in-law, and I think we could agree that we are better off now.

        Your statement about HFT firms exploiting the market is invalid because that is why everyone trades. To exploit the inefficiencies they see in the market. No one is trading for the greater good of the world. As far as I know co-location is available to anyone who wants to pay for it but frankly, it will take more than a colo to compete at the level you are talking about.

        • I disagree. Eurodollars are not hogs. Very different markets with a different customer base. The volatility in the hogs, and in other thinly traded commodity markets is higher today than it was in the past.

          Allocation of trades goes to speed. HFT firms co-locate. They are always faster. HFT’s are not exploiting inefficiencies in the marketplace. All they are is faster. In the exclusive pit days, that is why you bought a membership-access to order flow. However, today, members are getting ripped off by the exchange since they have no shot at orders compared to HFT firms. This is even though they pay the same price, and same commission.

          In the old pit traded days, a 250 lot stop would not have moved the market 170 points in one trade. That’s what the hog market did. 7570 to 7740Bid.

          That’s running a casino, not a responsible market.

          • Michaelspina01

            Jeff,

            You said;
            ” I was in the Eurodollar pit for years. While markets got volatile, and their was favoritism and bagmen-the market remained orderly. A 170 point move on a 250 car stop order is not anywhere near orderly. The data I received later showed stops were set off all the way up and for the entire move, 1673 contracts traded in less than one minutes time.”

            You compared Eurodollars to hogs, I was pointing out that was not a fair comparison.

            Allocation of trades depends on the product. Some are FIFO some are Pro Rata. In a Pro Rata market speed has nothing to do with it. You said ” In the exclusive pit days, that is why you bought a membership-access to order flow.” Now instead of buying a membership you co-locate. How is paying for a co-lo any different than buying a membership? Both involve paying for superior access. In fact, when you bought a membership in the past you had superior access and payed lower rates. Establishing a co-lo by itself does not entitle you to lower rates than anyone else. You still need a seat to get the lowest rates (at least on CME).

            Maybe in the “old days” a 250 lot stop would not have moved the hogs 170 points in one trade. However the other 9000 lots that traded per day would not have been filled with the transparency we have today. The “old days” are over, that’s why they are called the old days. Markets evolve and so do the participants.

      • Michaelspina01

        Jeff,

        You can’t compare volatility in the Eurodollar contract years ago with volatility in the Hogs now. The two products are so different that it adds nothing to the discussion. Just because you can point to isolated incidents of abnormal volatility in thinly traded electronic markets doesn’t mean that the pit over the course of many sessions would have provided hedgers, or amyone else for that matter, with a more liquid market. I would argue the opposite. For the most part markets are more transparent and liquid now than when they were primarily pit traded. Add that to the fact that allocation of trades is done in a fair manner that all market participants are aware of, not because I am the brokers brother-in-law, and I think we could agree that we are better off now.

        Your statement about HFT firms exploiting the market is invalid because that is why everyone trades. To exploit the inefficiencies they see in the market. No one is trading for the greater good of the world. As far as I know co-location is available to anyone who wants to pay for it but frankly, it will take more than a colo to compete at the level you are talking about.

      • Ruven77

        As it happens, I agree with you that some improvements can and should be made to electronic trading. And I agree that it is likely that you and I are liable to come up better and more fair protocols than non-trader staff and management.

        But IT IS NOT TRUE that hedgers and commercial traders are unable to get fair treatment of their orders. If you are a hedger put in a price. If the market is there you will get filled. If you are a commercial and as often happens you think you are smarter than all the HFTs and locals then screw around with markets and stops and get a new one drilled..

        I am a professional trader. Guess what? I do some of my best work while I am asleep. I put in open order limits and when the markets go nuts on the pre-opens I am happy to wake up and find that their auto traders TOOK ADVANTAGE of my silly limit orders. And I say ‘Thank you very much sir. May I have another.” I make no pretensions to knowing how far a market is going to go when I put in a particular order. I decide “Do I want to buy or sell it here?” Yes or No?

        I think that electronic access to the thinner markets is one of the most innovative advantages the exchanges have ever provided to the markets overall. The people it hurt were the guys who had the hedgers and commercials at their mercy like the Bellies. For years the PB market should have been made a cash settled contract but several cronies hooked into commercial interests prevented it so that they could run the public out of that market. It was not screen trading that ruined PBs it was those very same traders who you say should be ‘advising’ management.

      • Ruven77

        As it happens, I agree with you that some improvements can and should be made to electronic trading. And I agree that it is likely that you and I are liable to come up better and more fair protocols than non-trader staff and management.

        But IT IS NOT TRUE that hedgers and commercial traders are unable to get fair treatment of their orders. If you are a hedger put in a price. If the market is there you will get filled. If you are a commercial and as often happens you think you are smarter than all the HFTs and locals then screw around with markets and stops and get a new one drilled..

        I am a professional trader. Guess what? I do some of my best work while I am asleep. I put in open order limits and when the markets go nuts on the pre-opens I am happy to wake up and find that their auto traders TOOK ADVANTAGE of my silly limit orders. And I say ‘Thank you very much sir. May I have another.” I make no pretensions to knowing how far a market is going to go when I put in a particular order. I decide “Do I want to buy or sell it here?” Yes or No?

        I think that electronic access to the thinner markets is one of the most innovative advantages the exchanges have ever provided to the markets overall. The people it hurt were the guys who had the hedgers and commercials at their mercy like the Bellies. For years the PB market should have been made a cash settled contract but several cronies hooked into commercial interests prevented it so that they could run the public out of that market. It was not screen trading that ruined PBs it was those very same traders who you say should be ‘advising’ management.

      • Ruven77

        As it happens, I agree with you that some improvements can and should be made to electronic trading. And I agree that it is likely that you and I are liable to come up better and more fair protocols than non-trader staff and management.

        But IT IS NOT TRUE that hedgers and commercial traders are unable to get fair treatment of their orders. If you are a hedger put in a price. If the market is there you will get filled. If you are a commercial and as often happens you think you are smarter than all the HFTs and locals then screw around with markets and stops and get a new one drilled..

        I am a professional trader. Guess what? I do some of my best work while I am asleep. I put in open order limits and when the markets go nuts on the pre-opens I am happy to wake up and find that their auto traders TOOK ADVANTAGE of my silly limit orders. And I say ‘Thank you very much sir. May I have another.” I make no pretensions to knowing how far a market is going to go when I put in a particular order. I decide “Do I want to buy or sell it here?” Yes or No?

        I think that electronic access to the thinner markets is one of the most innovative advantages the exchanges have ever provided to the markets overall. The people it hurt were the guys who had the hedgers and commercials at their mercy like the Bellies. For years the PB market should have been made a cash settled contract but several cronies hooked into commercial interests prevented it so that they could run the public out of that market. It was not screen trading that ruined PBs it was those very same traders who you say should be ‘advising’ management.

    • Were pits perfect? No. Am I advocating for them to do 100% of the business again? No. But the way the current market is structured technologically in thinly traded markets like coffee, cocoa, orange juice, nat. gas, hogs, rice, oats is hurting the market. In the long run, most hedgers will find it cheaper to go to the OTC market to hedge. That’s why the markets supposedly exist.

      These thinly traded markets cannot be pushed through the same electronic hole that worldwide 24 hour markets like financial markets are. Eventually, you will hurt the market.

      I was in the Eurodollar pit for years. While markets got volatile, and their was favoritism and bagmen-the market remained orderly. A 170 point move on a 250 car stop order is not anywhere near orderly. The data I received later showed stops were set off all the way up and for the entire move, 1673 contracts traded in less than one minutes time.

      I was in the hog pit from 2003-2010, and traded it briefly in 1996-1998. The market moved, but I only saw it move once like that(near a close in 2006). This is happening with more regularity.

      The screen based trading isn’t the problem per se. But, the HFT and algo firms exploit the electronic system every bit as much as the bagman of old. If you think they are pure, I have a bridge to sell you in Brooklyn. Quote stuffing, sniffer programs, and other practices are programmed in with increasing regularity. Because of co-location, they have a speed advantage not available to other full paying members (supposed peers)

      Exchanges have a responsibility to the marketplace. In the old days, they used a committee system that managed markets. Now, there is no committee-it falls on the exchange itself. Exchanges need to tailor technology to meld correctly with different marketplaces. You are experienced enough to know that one market isn’t just like another.

      In the case of thinly traded markets, they ought to consider some significant changes. Development of new technology to interface with the market-and limits on what HFT and algo traders can do. Other commenters have talked about iceberg orders, stuff trading away from the market that they don’t have a shot at. Short term, there might be volume. Long term they risk harming the entire marketplace. Take a walk by the pork bellies and look at volume and open interest. Or better yet, check out the onion market.

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