When A Market Becomes A Casino

Was reading a short article on the plight of the cattle futures market. This has been happening over the course of the last seven years.  Seven years ago, the meat markets at the CME started to flip from open outcry to electronic. CME aggressively tried to move the market from pit to screen.  CME extended trading hours and the overnight moves in the markets increased the risk to hold positions by a lot.  Intraday, open outcry traders didn’t have as good of access to the screen, and so liquidity started to drain out of both the hogs and cattle markets.

I traded hogs from 2003-2010, and left the market because it was almost impossible to make money.  Most of my fellow traders said the same. I know long time traders that tried to fix the market back around 2010, and their efforts were rebuffed.

Now, the market isn’t a market, it’s a risky casino.  Traders have no chance.  When traders have no chance, liquidity dries up and the slippage scares away bonafide hedgers.  Without bonafide hedgers and small speculators, you can’t have a market.

The really interesting thing to me about the meat markets was the number of smaller traders there were who could absorb little shocks during the day and added stability to the market.  Layer on the medium size spread traders who would hold positions, build positions and keep markets in line-and then the next layer of very large spread traders who made moves when larger shocks came into the market.   They are all gone.

Certainly, the lack of cash trading in cattle is causing dislocations to the cattle futures market.  That’s a problem that CME can’t solve, but has to integrate into the make up of a new contract.  After reading Alvin Roth’s book about matching markets, I was really able to contemplate what markets are made of.

CME can do some things to help the market.  It cut trading hours, but locals were already dead so they will have to “grow” some new ones.  What they need to do is slow the market down. They ended pit trading so there isn’t a bifurcation of volume.  Slowing the market down would give every one a chance.  There is no need for the cattle market, the hog market, or any of the grain markets to trade as fast as E-Mini futures.  Slower trade matching allows more volume to coagulate around bids/asks.  I’d also take off the automatic spread engines.  Let spreaders make the markets and take advantage if things get out of line.  That’s how you build liquidity.



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