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The following is a commentary I published in my eponymous newsletter
today:
The Changing Dynamics of CBOT Ags Opening Call
By John J. Lothian
When side by side trading starts in CBOT ags on August 1, I expect
the dynamics of the opening call will be changed forever, assuming e-
CBOT ags receive enough orders to make it relevant. For the
purposes of this commentary, I am going to assume e-CBOT ags will
receive a statistically significant enough number of bids and offers
to do just that.
Prior to the 9:30 AM opening of CBOT side by side ag trading there
will be a pre-opening for traders to enter orders in both the
electronic and open outcry markets. Currently, in the open outcry
market, orders are accepted once brokers or their assistants start
accepting orders via paper order tickets or on Electronic Clerk
devices. On e-CBOT, as the orders accumulate in the electronic
order book beginning at 8:30 AM, anyone with access to market depth
on e-CBOT will be able to see for themselves the accumulating bids
and offers and where the market is indicated to open. This is
similar to being able to see into a floor broker's deck of orders
and you directly seeing where the buying and selling orders are.
Of course, the difference between a floor broker's order deck and
the electronic order book is that the order book is a transparent
single centralized depository for all bids and offers and the
broker's deck is supposed to be a guarded secret. And, each floor
broker only has an order sample size representing those firms for
which he or she fills orders for. If there are 10 brokers in front
month soybeans, and assuming each broker handles about the same
amount of orders ( just an assumption, not fact ), then one single
broker would have an order sample of about 10% of the total orders.
Of course, brokers may share opening indications with other traders,
including other brokers, so this information is aggregated in a less
scientific and transparent manner.
The e-CBOT pre-open period is the "time in which orders can be
entered, deleted and amended," but trade matching does not take
place, according to information on the CBOT web site. Currently for
the evening electronic session the pre-opening for ags is from 5:30
to 6:35 PM, but there is also an afternoon session from 2:30 to 3:55
PM. With the introduction of daytime electronic ag trading, there
will be a trading HALT from 6:00 AM to 8:30 AM and a pre-opening
session from 8:30 to 9:30 AM.
It should be noted that during the 6 to 8:30 AM trading halt,
traders can still interact in a limited number of ways with existing
day and open orders. And it should be understood a day order
entered any time from the 2:30 to 3:55 pre-opening or during the
evening session until the 6:00 AM suspension will continue to work
during the day electronic trading hours unless cancelled.
Here are the ways orders can be modified during the pre 8:30 AM
trading HALT:
During the Halt period from 6:00 a.m. ? 8:30 a.m. the following
functions are permitted:
? All Day and Good-til-Canceled (GTC) orders remain in the book
? Orders can be pulled
? Order volume can be revised down
? Strategies can be created
? ITM Logon and logoff is permitted (logoff will cancel all day
orders)
Here are the ways orders can't be modified:
During the Halt period from 6:00 a.m. ? 8:30 a.m., the following
functions are not permitted:
? Revision of price
? Submission of orders
? Request for Quotes
? Revision of GTC date
Beginning at the 8:30 AM pre-opening traders will be able to enter
new orders for the daytime electronic ag session. This will begin
the jockeying for position for the opening. Any market improving
orders placed in the first few minutes could have an inordinate
amount of influence on the opening call, as this information is
transmitted to customers and broadcast to traders and they respond
with their own orders. However, because of the speed and
distribution of e-CBOT, more customers and traders will be able to
enter orders at the last minute prior to the 9:30 opening than would
have if routing the orders to the trading floor.
In fact, an order sent to e-CBOT in the last seconds prior to the
market opening at 9:30 could have a stark improvement in its
prospects of being filled. A last second e-CBOT order that improves
the market could have priority to be filled, with certain priority
pro-rata algorithm limits, rather than be ignored for minutes if
routed to the trading floor.
While the overnight trading session price action and close will
influence the opening calls, the real-time dynamic prices entered
into the e-CBOT market will have a greater influence. They will
reflect the knowledge of the overnight action, any news or weather
and a new dynamic of traders being able to respond to the
transparent order flow in e-CBOT developing in the market right
before their eyes.
It will be hard to ignore the e-CBOT ag price information available
because of its streaming, real-time nature. Need a last minute call
for the market? Are you going to call the floor again and bother
the broker or a broker's assistant readying for the market's opening
or are you going to glance at the e-CBOT prices and see where the
market is indicated? The tighter the e-CBOT market, the more people
will look there. Over time, more and more people will be viewing
the e-CBOT prices for their opening calls.
Back in the 1980s when I was a news reporter for Knight
Ridder/Commodity News Service on the CBOT ag floor, I would go from
pit to pit collecting opening calls and then phone an editor who
blasted out the information. Will floor based news reporters at the
CBOT run around and do a last minute survey of brokers, or will they
look up at the newly installed plasma screens on the trading floor
for an indication of the e-CBOT prices?
The e-CBOT price information is exactly the type of data that some
electronic proprietary traders, who don't currently trade the open
outcry market, are looking for. They want to read the flow, the
book and the order imbalances. There are retail traders who like
and use this transparency as well. And then of course there are
algorithmic traders who in time will be a presence in the e-CBOT ag
markets, with their price injection models. They will be interested
in this order flow information as well. One recent data trend at
the CBOT has been the request for market depth historical data, not
just trade price and volume information. Hedge funds and
proprietary trading firms have been requesting this information, I
have been told by CBOT sources.
These are exactly the types of traders the CBOT expects to attract
to the e-CBOT side of the side by side ag markets. But it won't
just be these new traders who take advantage of the e-CBOT pre-
opening market information. Over time, the pre-opening e-CBOT
prices will replace the pit as the source of pre-opening market
indications as more and more traders refer to it for an opening call.
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