U.S. Grain CONTRACTS Tap Benefits of CME Globex
When the Chicago Board of Trade (CBOT) merged with the Chicago Mercantile Exchange (CME) in 2007, one of the most obvious benefits was the efficiencies to be gained by consolidating trading operations. While legacy CME floor-traded contracts moved to the trading floor at the CBOT building, legacy CBOT electronic contracts moved in the other direction, migrating from the e-cbot platform to the CME Globex electronic trading platform.
With them moved wheat contracts from the Kansas City Board of Trade (KCBT) and Minneapolis Grain Exchange (MGEX). As a result of thorough preparation for the shift to CME Globex, officials at all three exchanges agree that the migration was seamless and hardly noticeable to customers when it occurred in January 2008. "Having all three exchanges on the same platform provides the efficiencies of one-stop shopping for U.S. grain risk management needs," says Jeff Borchardt, KCBT president and chief executive officer. "For those trading companies or intermediaries that deal in grain, it requires access to fewer platforms to conduct business, thereby reducing costs. It also gives the three exchanges the ability to offer trading strategies between products more efficiently, intra-platform rather than inter-platform."
Although all three exchanges trade wheat on CME Globex, each exchange trades a different class of wheat with different uses. "CME Group trades a soft red winter wheat (milled mainly for flour used in crackers, biscuits and cookies), KCBT a hard red winter wheat (a higher protein wheat milled into flour used for breads), and MGEX a hard red spring wheat (a higher protein class milled into flour used in breads, bagels and hard-baked goods)," explains Richard Jelinek, associate director, commodities, CME Group. CME Group's wheat class has the lowest physical production - but the highest volume of all wheat markets in the world - due to its liquidity and transparency. Having all three exchanges' products on the same platform allows for easier electronic spreading.
When it comes to trading platforms, putting multiple markets together on one platform is an excellent idea, especially when that platform is CME Globex, which has won renown around the world for its speed, reliability and scalability since it was launched in 1992.
"Electronic availability is the key for all of today's markets, not just wheat, and consolidating products on a single platform creates efficiencies," adds Susan Sutherland, associate director, commodities, at CME Group.
For CME Group, the shift to one platform means the exchange can concentrate on further developing and enhancing CME Globex. Jelinek points out that this ongoing process has improved the average round-trip response time across all product complexes from 31 milliseconds to 13.7 milliseconds in the first quarter of 2008.
Electronic trading in grain and soybean futures has grown dramatically since side-by-side trading began on Aug. 1, 2006, and now accounts for more than 80 percent of total volume in some of the major CME Group futures contracts. The focus has now turned to options. The platform's sophisticated technology, rich functionality and strong distribution provide perfect growing conditions for those contracts. Side-by-side trading for grain and oilseed options during regular daytime trading hours began on April 14. As side-by-side futures trading has produced a marked increase in total volume, attracted new market participants and hiked the electronic share of trading, CME Group anticipates similar results from side-by-side trading of grain and oilseed options. "We are excited to have our products listed on the CME Globex platform," says James Facente, director, market operations, clearing and information technology at MGEX, describing CME Group as innovative market leaders and CME Globex as the "premier" trading platform in the world. "We now have exposure to new participants and new markets when you look at the platform's connectivity to overseas areas. We have always had overseas customers, but the ease of access to one platform that is as reliable and easy to use as CME Globex gives us a much greater audience."
With the growing role of Brazil, Russia, India and China, as well as other developing nations in global markets, those connections will become increasingly important. CME Globex already has a world network distribution of 1,100 direct connections in more than 80 countries.
"Having all three U.S. grain exchanges on one platform offering electronic trading day and night allows worldwide access to all of these global benchmark products in the most efficient and cost-effective manner," Borchardt says. "At KCBT, we have certainly noticed an increase in global commercial participation in our contracts as a result."
First-quarter 2008 trading volume already shows the effect of having all the grain futures contracts available on CME Globex for most of the quarter. Average daily volume of grain and oilseed futures jumped 27 percent for the first quarter of 2008 from the same period a year earlier. As the chart illustrates, electronic futures trading growth was even more impressive. CME Globex accounted for 61 percent of wheat futures volume for the first quarter of 2008 versus 42 percent for the year-earlier period.
MGEX and KCBT also felt the positive effects of the migration to CME Globex. At MGEX, wheat futures volume rose 24.5 percent for the first quarter of 2008 compared with the same period a year ago, and the percentage traded electronically doubled to 41.3 percent in 2008 from 20.8 percent in 2007. Total wheat futures volume at KCBT climbed 16.7 percent in the first quarter of 2008 compared with the prior year.
For the futures commission merchants and brokerage firms, having all contracts on CME Globex also means more efficient operations on the other end of the connectivity pipe, because the firms need to maintain only one connection to a trading platform instead of accommodating multiple configurations of different platforms.
And for customers, having everything they trade on CME Globex provides a number of benefits: shorter execution trading times, reduced trade costs and more choices in trading products and venues.
"The broad distribution that CME Globex offers makes it easier for our global customers, both hedgers and traders alike, to participate in CME Group's grain and oilseed complex," Jelinek says.
At the same time, those who have been trading agricultural products have improved access to the other product complexes available on the same CME Globex platform When it comes to futures and options trading and CME Globex, there is power in one.
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