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Electronic Grain Trading Arrives
by Elise Fleischaker

In 1851, the earliest "forward" contract for 3,000 bushels of corn was recorded at the Chicago Board of Trade (CBOT). Billions of futures contracts later in August of 2006, the CBOT launched electronic side-by-side trading of its agricultural futures complex during daytime hours.
The trading floor at the Chicago Board of Trade.

This transition has changed the grain markets and in turn affected the grain elevator operators, local traders and brokers. First, electronic trading has helped increase volumes and tightened the markets to previously unseen levels. Second, it has established instant execution as the norm, not the exception. Furthermore, it has attracted more “non-traditional” speculators who have tremendous power to move the markets. For the grain trader, grain elevator operator and farmer it is time to do an end-to-end review of how they interact with the grain markets.

The increased use of electronic grain trading is one of the factors that have contributed to the tremendous increase in trading volume. The CBOT agricultural complex has seen consistent volume increases since the adoption of side-by-side trading. The single-day record of 1,047,096 contracts was set on November 8, 2006.

Bruce Williams using electronic trading during a typical work day.

Long-time CBOT “local” trader Bruce Williams experienced first hand the recent migration of floor-to-screen trading. Bruce began his career trading financials at the CBOT in 1982. His plan was to make enough money to buy a full seat at the Exchange so he could move into the grain markets. In 1988, he made that switch into the soybean pit.

Electronic trading started at the CBOT 1994. The following year, members approved electronic trading of agricultural products, but only during off-exchange hours. As more and more markets began to thrive in an electronic environment, it became apparent that it was only a matter of time before the grain markets went to the screen.

“I was someone who made his livelihood on the floor and respected the value of the floor community so I wasn’t in a hurry for daytime electronic trading,” Williams said. He added, “I knew that the change was inevitable, though, and needed to prepare for the future of the grain markets.”

To help him get ready, Williams teamed with Kit Kuyper, an electronic trading veteran who had previously executed Bruce’s overnight grain trades on the screen when Kit worked for Cargill Investor Services. Their first decision was to select a trading platform that was fast, reliable and intuitive. There are a multitude of trading platforms available including those from CQG, NYFIX, Patsytems and Trading Technologies (TT). Eventually they selected TT’s X_TRADER®.

Asked why he chose X_TRADER, Williams commented, “Even though I’m a front-month trader who doesn’t do a lot of sophisticated spreading strategies, functionality and robustness do matter a great deal. I needed a front-end that was lightning fast, but had an intuitive interface since I’m not a technology guru.”

One of the largest differences between using a broker to execute on the floor and trading on the screen is instant execution. With electronic trading, grain elevator operators enter trades in real time and no longer need to wait hours for a fill. The difference between estimated and actual costs (what the industry calls “slippage”) is reduced, too. In this way, grain traders can hedge their positions and then actively assess the market for speculative trading opportunities.

In many ways, the pit has been opened up to the world. “Non-traditional” participants have entered the agricultural markets with gusto. Immediate execution is more important now with the arrival of hedge funds, Commodity Trading Advisors (CTAs) and other market speculators because they have the ability to move the markets quickly and dramatically and to push the markets far above or below where the fundamentals may indicate. Therefore, the ability of a commercial market user to quickly get in and out of a position is of greater importance than ever before.

Side-by-side trading provides grain elevator managers and operators with the option of placing their orders the traditional way -- through a call to their broker -- or on a computer. Electronic platforms also provide sophisticated tools for risk management. Williams pointed out that “…X_TRADER would be a natural fit for the grain elevator operator who wanted to not only hedge their risk against the cash market, but actively manage that position based on the market’s ebb and flow.”

Williams believes the increased liquidity brought on by new market participants allows elevator managers and farmers more opportunities to hedge their risk. Prior to going electronic, the grains were not year-round liquid markets, forcing farmers to hedge their exposure within a certain time frame. Electronic trading brought more participants to the markets and gave rise to year-round liquidity, which means year-round hedging and trading opportunities for everyone.

The launch of side-by-side electronic grain trading in August of 2006 changed the dynamics of the grain markets. They have become high-volume, liquid markets that attract hedge funds and a variety of other traders who have not traditionally participated in the agricultural markets. The increasing use of electronic markets challenges traditional grain traders to adapt to an entirely new way of trading and a new trading environment. But along with challenges have come many benefits that the grain market pits could not offer. Thanks to electronic trading, traders now have instant market access, access to risk management tools, instant notification of fills and complete anonymity. The migration to the screen will continue, with pioneering traders like Williams and Kuyper leading the way.

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