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CBOT floor trading system fading, but 100% eCBOT not likely

Agriculture.com Staff 03/26/2007 @ 8:30am

CHICAGO, Illinois -- They could flip the switch to all-electronic trading, but that would be an imprudent thing to do to the market, one Chicago Board of Trade spokesman said.

"That wouldn't even be something we would contemplate," says Bob Ray, CBOT senior vice-president of business development.

Ray says the market is changing more than anyone expected, but hopes the move from open-outcry floor trading to 100% electronic will be more of a migration rather than a thrust into cyberspace.

In Europe, the LIFFE market went abruptly electronic, a lesson to learn by, Ray says. "One Friday, it shut down and the following Monday went electronic. Their volumes, liquidity pool and everything dropped dramatically. You just can't take that capital pool, and intellectual entrepreneurialship and cut it off."

Statistics show the CBOT agricultural pits are taking to the electronic trading, also called screen trading, quicker than other pits.

The CBOT Treasury market took two to three years to get to the point where it was trading 50% to 60% more on the screen than on the floor. For metals, it took about a year before critical mass on the screen was reached. For grains, it only took about eight weeks for electronic trading to take over 50% of all trades.

On Wednesday of last week, CBOT corn futures' electronic volume was 148,800 contracts compared to 51,000 in open auction. For soybeans, 48,000 contracts traded electronically, 30,900 in the pits.

Should producers be concerned about the CBOT floor trading method giving way to electronic trading? One producer recently expressed concern in the Agriculture Online Marketing discussion group.

"I think it takes out some of the human emotion that gets pumping on the floor," the producer said. "I would venture to guess we could have less quick limit moves up and down. I have even heard talk to have the trade run 24 hours a day then as well. I personally think they should leave well enough alone."

A broker in the same discussion group agreed that computer trading removes the emotion and excitement. "They say electronic trading offers instantaneous contract fills, but most front month pit markets have very fast fills. Why do we need instant fills as a farmer?" he said.

Others joining the online discussion group see no problem with the CBOT going completely electronic.

"Some traders say the screen trading puts all the dealing above board," one producer said in the discussion group. "Put the crooked floor trader in the oat pit out of business (their words, not mine)."

Ray said producers would eventually be able to see the electronic platform offers transparency. In the short-term, there are some producer concerns, and some are valid, Ray says.

"To the extent that it's new and nobody likes change, I understand how the producers feel," he says. "But, long-term it creates greater trading opportunities for all end-users."

Ray adds, "I think the producer is struggling with the idea that electronic trading brings in a whole new class of users to the market that were never in there before. For example, pension funds, hedge funds, ETFs, index funds. All of the groups are now looking at commodities as an asset class."

These trade groups use to call commodities an alternative class, but the word alternative is being dropped, Ray says. "This suggests some permanence to it, right?"

CHICAGO, Illinois -- They could flip the switch to all-electronic trading, but that would be an imprudent thing to do to the market, one Chicago Board of Trade spokesman said.

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