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Wednesday, Apr 16, 2014

Business

CME trading outage showed that man can still match the machine

Reuters | Wednesday, Apr 16, 2014

NEW YORK/CHICAGO - Just over a week ago, CME Group Inc suffered the worst-ever trading outage on the world's most important agricultural markets, plunging electronic screens into darkness and sending dozens of traders scrambling for Chicago's famous but now often deserted trading "pits".

It seemed like an impossible task: replace the seamless efficiency of an electronic trading screen with hand signals and guttural shouts to execute clients' orders to trade corn, wheat or cattle during the "close", often the busiest time of the day.

But a Reuters analysis of CME trading data on the day of the outage, April 8, showed they largely succeeded in replacing the machines in at least some markets despite the difficulties of suddenly using floor trading skills that have mostly died out.

In the open-outcry wheat futures pit, for instance, traders executed a total of 22,606 contracts in the 37 minutes between the start of the electronic outage and the closing bell at 1:15 p.m. CST (2.15 p.m. EDT), according to the analysis, which is the first to show in detail how trading activity was affected.

That's about 40 times more than the average floor volume during that time for the previous nine trading days, and came close to the average 24,000 contracts traded in the same period on CME's Globex electronic platform, which was shut down by an unidentified glitch.

The surprisingly strong showing by floor brokers, who for years have been losing market share to computerized trading, shows that human traders may still have an important role to play in making markets for the staples of the US economy - especially when things go wrong.

"It's a good reminder as to why we still have the pits around," said Jerrod Kitt, analyst at the Linn Group, a futures brokerage that still maintains a presence in the CME's agricultural trading pits in Chicago.

To be sure, various factors, such as contract expiration dates and the timing of key crop reports, can impact volumes on any given day, and the data provided by the exchange is only a subset of a much larger market for agricultural futures traded on the CME. The exchange operator owns the Chicago Board of Trade, Chicago Mercantile Exchange and other trading venues.

Still, analysts who reviewed the data said they were impressed, if not surprised, by the volume handled by floor brokers during the April 8 outage. On a typical day, electronic trading now accounts for nearly 95 per cent of volume in grain markets on the CME, with pit traders handling the other 5 per cent. The glitch meant that the pit handled 100 per cent, if only briefly.

"I thought the volume, looking at these numbers, was overall very good, especially for no heads-up," said Terry Reilly, senior commodity analyst for Futures International.

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