Pit closures = corn, soybean market instability, trader says

It's been six years since CME Group shifted from trading agricultural commodities mostly on the floor of the exchange to its electronic trading platform (Globex).

In July 2015, the exchange closed its agricultural futures trading pits, leaving open only its options trading pits. This May, CME Group officially closed all its open-outcry trading pits, ending a tradition that started in the mid-19th century.

The Chicago Board of Trade (CBOT) Exchange opened in 1848. Corn, wheat, and oats open-outcry futures contracts started trading in 1877. Soybean open-outcry futures contracts opened in 1936.

Open outcry consists of humans standing in a trading pit, yelling bids and offers, and using hand signals to buy and sell contracts.

The latest round of option trading pit closures officially ends this practice of pricing for hogs, cattle, corn, soybeans, and wheat in Chicago.

Trading on CME Group's Globex, conducted online by hundreds of millions of traders globally, has proved to be a more efficient and profitable trading method.

Open-outcry trade volume had decreased by 75% since 2008. In 2015, open-outcry futures contracts made up only 1% of the company's business. As early as 1998, the handwriting was on the wall for floor trading to be replaced by the electronic trading screen with the introduction of the Globex system.

PJ Quaid, an independent broker, spent 24 years in the corn options pit on the floor of the Chicago Board of Trade, now part of CME Group.

"There was no place like the floor, not anywhere in the world," Quaid says. "Those pits were full of traders who would take enormous risks. Every time you had an order to buy or sell, you could talk to your customer and let them know if the offer was going to be easy or hard to fill. And you knew that the order was going to affect the market, so you had to constantly know where the market was and what was going on and watch how big positions were put on."

The longtime trader says the best thing about the floor was that it created deep competitive markets, and the customer was the benefit of that every time.

"You knew the person on the other side of the trade, which gave the transaction integrity. It was a customer-friendly environment," he says.

Market Changes

Since the close of the futures trading floor in 2015, the biggest change to the farm markets has been their instability, traders say.

At one time, the pit trading and the electronic trading prices and volumes were listed side by side on a board on the wall of the CBOT trading floor.

"When the pits were fully populated, the markets were stable. There's no way you can argue that. Once these Chicago markets went electronic, volatility ramped up," Quaid says.

"As the screen [electronic] trading took more and more of the market share, I noticed liquidity get worse," he adds. "If you ever put a chart of how the markets moved before electronic trading against a chart of how markets moved after electronic trading, you would see what I mean."

Successful markets don't necessarily involve volatility, he explains. "I want markets that serve the purpose. The purpose of these instruments is to transfer the risk of the farmers, ethanol plants, hedgers, ranchers," Quaid says.

Once electronic trading took over, big local traders trimmed back their trade size.

The market moves became more sharp, the independent trader says.

Working Electronically

When CME Group shut down the floor's option pits March 11, 2020, because of the coronavirus pandemic, Quaid continued working with customers from his home, believing the floor would open again.

"I didn't want my customers just to linger listless. I taught a lot of them how to enter orders and at what prices I recommended to place their orders. I'm sure that I made my job obsolete. But farmers were still able to get things done," Quaid says.

When corn traded below $3 per bushel in April 2020, people were down and upset.

"A lot of these farmers, you know how they are, if corn is $8 they will wait until $9 to sell. The farmers who bought puts are happy, because they've been able to ride the price up. And a lot of producers who did sell last year's crops have had re-ownership plans, allowing them to partake in these rallies," the independent broker says.

Quaid believes these farm markets are still pretty liquid, but when the pits were open there was a counterbalance to keep them in check. That's what is missing now, he says.

On any given day, each commodity is confined to trading any higher or lower than its exchange-regulated limit.

For instance, the current daily limit for corn is 40¢ per bushel; soybeans $1.00 per bushel; wheat 45 cents per bushel.

"The big scare that I have with no pits has to do with the days that the markets trade at their daily limits. When that happens the markets turn off," Quaid says. If the futures contracts are locked limit up or down, you can't hedge a trade; markets will not be made.

"On those types of days, 40 elevators could be calling to put on hedges, and it will overwhelm any trader. When we traded on the floor, markets were made synthetically. The local traders made markets by taking on the risk, when the futures and options pits were locked. That is something that is going to be missed very, very, very deeply," he says.

Scott Shellady of Ag Optimus spent 27 years on trading floors, 16 of those in Chicago trading corn, soybean futures, and options contracts.

"In the old days, the flow of trading information was on the floor. But as social media and electronic messaging arrived in the mid- to late 1990s, all of a sudden it seemed the outside world had an advantage. Traders had an edge on the floor before electronic messaging arrived," Shellady says.

Because the floor is now gone, Shellady agrees that the farm markets can be more volatile.

"Sometimes I think that when the market gets really volatile, the bids and offers are not on the screen anymore," Shellady says.

The trading floor was a natural bottleneck of volume, with a certain amount of trading. The screen offers higher trade volume, Shellady says.