CME block trades within rules: CFTC


A controversial futures trading mechanism on the Chicago Board of Trade (CBOT) has seen the bulk of trade fall within nearby months, rather than further down the curve where the CME Group had anticipated, a report from the US commodity futures industry watchdog said Monday.

However, block trading, as it is known, has fallen within CME Group's rules on “fair and reasonable pricing”, the CFTC’s Division of Market Oversight said in a report published late Monday.

Block trades are typically larger deals, privately-negotiated, but cleared via an exchange before appearing as volume like any other deal.

Common in energy markets, block trades have divided the agriculture market since CME Group allowed them to be executed on grains, oilseeds and other contracts it hosts on the Chicago Board of Trade (CBOT) earlier this year.

CBOT, as it is known, hosts the most liquid agricultural contracts in the world for wheat, corn, soybean, soymeal and soyoil.


Detractors claim block trading limits price transparency, as it typically takes place off market during periods when sufficient market liquidity already exists, potentially limiting liquidity for other market participants.

But CME Group has previously justified permission of block trades as offering customers the ability to fill large orders at a single price, with a likely upshot being increased liquidity in thinly-traded, deferred positions.

The report appeared to partially confirm arguments from both sides of the market, without coming down on one side.

It noted “block trades are still occurring mainly in the nearby months,” which contradicted the argument it would increase liquidity further out.

“Block trades are insignificant compared to total volume, but the analysis shows block trades can be a significant percent of the total volume in an individual contract month on specific days,” it added.

But it concluded “blocks appear to be priced within the CME rules for ‘fair and reasonable’ prices,” adding the CFTC will continue to monitor how block trading develops in the agriculture market.


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