CME Opens Electronic Futures Trading After Four-Hour Delay

Aug 24, 2014 11:37 pm ET

(Updates with quote in sixth paragraph.)

Aug. 25 (Bloomberg) -- The Chicago Mercantile Exchange started electronic futures trading after a technical issue halted markets for as long as four hours, affecting contracts from U.S. stock indexes to Treasuries, oil and gold.

CME Group Inc., the world’s largest futures market, had suspended all of its Globex electronic-trading markets except for Malaysian equity-index derivatives, according to its website. Trading, which was scheduled to start at 5 p.m. Chicago time for some products, began at 9 p.m. All day and session orders, including so-called good-til-date orders with today’s trade date, will be canceled, the bourse said.

“Clients hate it,” said Evan Lucas, a Melbourne-based strategist at IG Ltd., a provider of equity-index, commodities and currencies trading, about the outage. “They couldn’t increase or more importantly shut positions, but there is nothing you can do.”

U.S. futures trading in everything from stocks to bonds, energy and agricultural products is dominated by the CME and InterContinental Exchange Inc., which last year bought the New York Stock Exchange. Dozens of commodities from corn to West Texas Intermediate crude change hands on the all-electronic Globex platform that begins on Sunday nights in the U.S., as well as currency, interest-rate and stock-index contracts.

The CME has mostly avoided the larger market structure breakdowns that plagued U.S. equity venues over the last five years, though a futures contract traded on its platform was identified by regulators as helping precipitate the flash crash in May 2010. In the stock market, U.S. Securities and Exchange Commission Chair Mary Jo White has demanded infrastructure and procedural improvements as a way to restore investor confidence.

Open Interest

“We do a lot of futures, especially CME commodities, so it did affect some of our clients but we did not receive a lot of complaints as the volume was thin,” said Jackson Wong, Hong Kong-based vice president at Tanrich Securities Co., about today’s halt. “It would be a big deal if it happened during New York hours.”

Volume in the cash Treasuries market is picking up now CME has resumed futures trading, said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo.

“The liquidity has been absolutely dreadful,” he said. “Both Eurodollar futures and note futures have been closed. Those two markets are very highly intertwined with the Treasury market. I can already see the screens populating with a bit more depth.”

CME Group said in a press release earlier this month that open interest across asset classes reached a record 103.4 million positions on Aug. 7. Average volume for August was 14 million contracts at that date, up 33 percent from the year- earlier period.

Hedging Strategies

Traders use futures to speculate on price direction in underlying assets and carry out hedging strategies. For instance, an investor who holds individual stocks or exchange- traded funds might sell a Standard & Poor’s 500 Index contract to protect against losses from broad market moves.

The CME is where investors trade the most WTI crude and Henry Hub natural gas contracts, the U.S. benchmarks for the fuel. About 500,000 crude contracts and 300,000 gas futures are traded on average through the bourse every day. Brent, the grade for more than half of the world’s oil, is largely traded on the London-based ICE Futures Europe exchange.

Asset classes where there is also a spot market, such as precious metals, are less affected when futures are halted, according to Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney. Investors can trade spot gold, silver, platinum and palladium in London while those in China, the world’s largest consumer and producer, can trade bullion on both the Shanghai Gold Exchange and Shanghai Futures Exchange.

Risk Transfer

“The biggest problem you might have is with some of the agricultural products because people rely on it quite heavily,” Barratt said by phone today before trading resumed. “You’re taking away a risk transfer mechanism that people rely on.”

For stock investors, the CME’s electronic venue enables the trading of futures on the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100 Index, as well as contracts on Japan’s Nikkei 225 Stock Average and India’s CNX Nifty index. Among the most popular equity contracts is the so-called e-mini future on the S&P 500, which has seen about 1.5 million change hands daily on average in August.

The CME halted trading for some futures contracts for more than 90 minutes on April 8 due to “technical issues.” The error prevented futures and options transactions in products including corn, wheat, cattle and hogs. The Chicago-based company’s largest revenue-producing contracts, such as interest- rate and stock-index futures, weren’t affected.

--With assistance from Matthew Leising in New York, Wes Goodman in Singapore, Ben Sharples in Melbourne and Kana Nishizawa in Hong Kong.