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Will history repeat itself at the CBOT?
Hoosier Ag TodayBy Gary Truitt
If it has been a while since you looked at commodity futures prices, you would be shocked to find that in the past month corn prices have gone up more than $1 a bushel, wheat has jumped more than $2 a bushel, and soybeans have risen by more than $3 a bushel. Even with this unprecedented volatility, this is not the real story of what is shaking the futures market to its core.

For the past six months the exchange has been experimenting with what is called side-by-side trading. This is, in effect, two trading methods: the traditional open outcry and the new electronic trade.

Open outcry stems from the opening days of the exchange and has traders standing in a tiered pit yelling what they are selling or buying and at what price. They also use a series of hand gestures since, with everyone yelling, no one can understand what is being said. To the uninformed, a visit to the trading floor seems like a visit to an insane asylum. Hang around long enough and you begin to get the hang of things, and hang around too long and you will fall in love with the cacophony.

Electronic trading, as the name implies, is all done by computers. You sit in a cubicle in an office someplace in the world, enter your trade, and click your way to fortune or bankruptcy. Right now the trading community is divided into two camps: those who love electronic trading and those who hate it.

At Hoosier Ag Today, I work with two analysts, Gary Wilhelmi who reports live from the trading floor of the Chicago Board of Trade (CBOT) and Jim Riley with Riley trading in Brookston, Ind.

Jim likes electronic trading while Gary hates it. Jim said he gets his customers’ orders filled quicker and more accurately with electronic trading. Gary said the electronic side cannot keep up with a fast and volatile market and, since the trades are anonymous, you cannot tell who or what is moving the market.

In a way they are both right. The electronic system is much more efficient than the open outcry approach, while the electronic system can fall behind in a fast and volatile market. Yet, judging by the numbers, the electronic side is winning. On most days in the last month, electronic trading has accounted for about half of all the volume in the market. On some days, it has surpassed the floor trade.

Wilhelmi worries that, in the future, the floor will be empty and silent as the entire market is traded electronically. The extreme volatility of the past two months has hastened this trend as many longtime local traders have been forced out of the grain trade. The market today is controlled by large speculative and index funds. With more than 3 trillion dollars in assets, these funds trade vast amounts of corn, soybean, and wheat contracts daily, mostly electronically.

This kind of evolution has occurred before at the CBOT. Wilhelmi recalls the days of the Lard Pit. Back when we raised hogs for lard, they did trade lard futures in Chicago.

By 1965, however, the lard pit was the size of a phone booth and only had two traders. One day Wilhelmi, who was a floor runner, was handed a lard order by a phone clerk. When he reached the lard pit, he found it empty. He was then told that the trader was in his office on the 28th floor.

When Gary reached the office, he found the trader doing the crossword puzzle in the newspaper. Upon being presented with the order, the trader became very excited and said he knew where to find the other trader to complete the trade. It turned out the other trader was in the London Bar, across the street from the CBOT; so they dashed across LaSalle Street, entered the bar, and conducted the trade. They all then had a drink to what was the last lard trade that ever occurred. The pit was closed shortly thereafter.

While it is too early to say if this history will be repeated for the rest of the agricultural futures market, the signs do seem to indicate a fundamental change is taking place at the CBOT.

This farm news was published in the Nov. 15, 2006 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.

11/15/2006