- Quick Take
- After increasing the trading hours in grains and oilseed contracts last year, the CME Group reversed its decision last month.
- The exchange operator took this step after several months of push back from its floor traders.
- This decision almost coincides with IntercontinentalExchange’s announcement of decreasing the trading hours for soft commodities once its purchase of NYSE Euronext is complete.
- The argument for both these moves was given as low liquidity, especially in the early hours.
- This may be a signal that market participants do not yet value extended trading hours as a crucial differentiator.
- However, in the long term market convergence and the dominance of algorithmic traders is likely to ensure that extended trading hours become a norm.
When IntercontinentalEchange (ICE) announced last year the launch of grain and oilseed futures contracts that would trade for 22 hours every day, the CME Group (CME), which dominates the trading in these derivative instruments, was quick in declaring an extension of its own trading cycle, from 17 hours to 21 hours a day, to prevent losing marketshare to ICE.
That time, some industry observers believed that the stage is set for longer trading hours across-the-board — something that hedge funds and algorithmic traders prefer because it gives then access to markets for longer time periods.
However, the CME Group announced last month that it will reverse that extension and move to a daily trading cycle of only 17.5 hours. The new trading cycle is set to take effect from April 8 and comes after several months of push back from brokers and traders who complained about fatigue and lower liquidity in the markets. 
The traders argued that longer trading hours actually spread out volumes over the whole day and reduced liquidity on CME’s exchanges at any point of time. Resultantly, brokers could not fill large orders.
Mark Schultz, the chief market analyst at Northstar Commodity Investment Co, says that brokers would sometimes “sit for three, four or five hours” without making any trades because the volume was spread over the longer trading period, according to Bloomberg Businessweek. 
This created problems for big customers as well because their orders remained either fully or partially unmatched. Obviously, they preferred to stay away from trading activity in such an environment to reduce the risk of wide movements in price while their orders were being executed. As a result, the trading volumes actually declined since CME implemented extended trading hours.
Interestingly, the IntercontinentalExchange also announced in March that it intends to reduce the trading hours for soft commodities (a term used for commodities like sugar, coffee and cocoa) once its purchase of NYSE Euronext is complete. It also cited low trading volumes in the early hours as the primary reason for this decision.  However, ICE has made no changes to its 22 hour trading cycle for grain and oilseed contracts yet.
We believe that these two announcements indicate that across-the-board extended hours trading may not become a reality in the short to medium term. However, eventually that is bound to happen as markets over the world converge and algorithms replace human traders and brokers. In 2012, 84% of CME’s contract volume was conducted electronically and it is only a matter of time when the demand of electronic trading entities for extended access to the markets takes precedence over the preferences of human traders. 
CME Maintains Its Lead
Another interesting insight from the above series of events is that the threat to CME from ICE’s extended hour trading seems to have passed for now. CME maintains its dominance in agricultural futures contracts and handled 73.2 million, 52 million and 27.4 million contracts of corn, soybean and wheat, respectively in 2012.
In contrast, ICE handled a total of just 464,155 corn, wheat, soybean, soybean-meal and soybean-oil futures contracts since their launch in may 2012, according to Bloomberg. 
That does not appear to be a major movement of trading volume marketshare from CME to ICE and would have made it easier for CME to cut trading hours. Further, it suggests that market participants do not still value extended timings as a major differentiating factor.
The Debate Does Not End Here
However, that does not mean that extended hours trading is set to never return. As mentioned earlier, the makets around the world continue to converge and more external (foreign) participants — primarily hedge funds and algorithmic traders – will increasingly trade on exchanges around the globe throughout the day, and demand access to markets over longer periods of time. Their preferences are likely to prevail over the long term as they continue to dominate trading volumes and edge out human brokers and dealers.
One acknowledgement of the above statement is that the CME Group has already acknowledged that its move to cut trading hours is not the “perfect” answer to all its clients and that it is trying to strike “a reasonable balance” in satisfying all its customers.  We believe that it is only a matter of time when that balance tilts in favor of trading algorithms.
It will be interesting to observe how ICE responds to the situation. Since it is completely run on an electronic platform, we believe that it might have an opportunity to attract hedge funds and algorithmic traders. However, for that to happen, it must first generate a critical mass of trading volumes, especially during those hours when CBOT will remain closed after the new trading hours are implemented on April 8th.
- CME Will Reduce Grain Trade Hours After Customer Survey, Bloomberg, March 5, 2013
- CME Group Cut in Grain Hours Increases ‘Excitement’ for Traders, Bloomberg Businessweek, April 04, 2013
- ICE Plans to Align Trading Hours of London, N.Y. Softs Contracts, Dow Jones, March 22, 2013
- Page 7 of 2012 10-K, Company filings
- CME Retreat on Grain Hours Welcomed by Traders Who Need to Sleep, Bloomberg, January 31, 2013
- CME Group says reduced grain cycle not “perfect” for all clients, Reuters, March 21, 2013
Disclosure: No Positions