We’ve come a long way since the days when futures exchanges were marketplaces for negotiating formal contracts between sellers and buyers of commodities, haven’t we? Wheat Farmer A wants to lock in a price for his crop next fall while flour mill B wants to ensure it has a supply of wheat and also lock in a price. Presto, there’s the Chicago Board of Trade, and later the Butter and Egg Board, which became the Chicago Mercantile Exchange. Simple, efficient.
Nowadays, futures exchanges like the combined CBOT-CME entityâ€”CME Group Inc.â€”trade so much more than commodities. And their sophistication in the form of high-speed electronic trading has far exceeded the old open-outcry trading pits. Better price discovery, more transparency, less inefficiency. Everyone should be happy.
Except, since MF Global collapsed and $1.2 billion or so in supposedly segregated and protected customer margin funds went missing, it seems nobody is happy. Not the farmers. Not the brokers. Certainly not the exchanges.
In everything I have read about MF Global’s collapse and the fallout from that, it’s the plight of the farmers, and their perspective, that has intrigued me the most. They are, after all, the primary reason these futures exchanges exist in the first place. Or they were. During the rise of what I’ll call the “speculative culture” some exchanges seem to have become preoccupied with providing products to suit and access for traders whose only interest is exploiting price moves and profiting from those exploitations. Up to a point, such interest can create better price discovery and reduce market inefficiencies. Beyond that point, however, the markets become hugely distorted and wildly inefficient. We seem to be there now. MF Global is just an example.
“CMEâ€”all the exchanges have focused on contracts, more growth, all these hedge funds, private equity funds that are getting into these markets. They are focused on that instead of their base business,” said Lance Holden, senior vice president with Wells Fargo Bank, the largest private lender to agribusiness that had customers who lost funds in the MF Global Collapse, in a story on how upset exchange customers are over the lack of oversight they see the CME exercising in the MF Global fiasco.
How have speculators, and the futures exchanges’ efforts to cater to them, hurt or helped the futures markets? Discuss.