![]() Yet, if or when large amounts of money is directed at these commodity indexes or directly into feeder futures markets, often for reasons unrelated to cattle markets, feeder futures go along for the ride. Often this type of trading includes broad-based commodity indexes of energy, precious metals and other commodities and of which feeder futures is a tiny proportion. Aided by computers and mechanical trading strategies, this type of activity tends to result in movements into and out of futures markets quickly and violently resulting in increasing market volatility as underlying liquidity is exhausted. Wider trading limits are not the cause of erratic futures market behavior and focusing on trading limits may be ignoring the underlying cause of volatility.Ī growing proportion of the outside (non-hedging) liquidity in feeder futures is, by many accounts, from sources motivated primarily by portfolio management rather than actually speculating based on feeder cattle market fundamentals. While this is necessary in a world of generally increased commodity market volatility and higher than historical price levels, it also allows larger futures price movements when no fundamental reason exists or when a “cooling off” period is warranted. Have trading hours become too long for the amount of traders taking positions each hour or even each minute given modern technology? Daily trading limits have been expanded to allow markets to adjust faster and not be hamstrung. Institutional changes in trading hours and daily price limits are all pieces of the puzzle. A question is, have changes in recent years have aggravated the problem and threaten the future viability of feeder futures? Liquidity is required for traders to have orders filled quickly, completely and cost effectively. Feeder futures (and especially options) have been thinly traded in the distant contracts making them difficult to use. Since their inception in 1971, feeder futures contracts have suffered from marginal levels of liquidity, which often limited the effectiveness of the contracts. Producers have historically been quick to blame speculators for unwarranted influence in cattle markets but without speculators there would not be enough liquidity for most agriculturally-based futures markets. Erratic futures price movements and increased basis volatility makes it difficult or impossible for the industry to use feeder futures for its two primary roles of risk management and price discovery. However, it is increasingly important to ask and deal with questions and concerns, or the alternative may be undesired.įeeder futures have become increasingly volatile in ways that often appear unrelated to market fundamentals. For many years, I have defended the value of futures markets and the role of speculators in making those markets possible. A growing chorus of cattle producers are expressing frustration regarding feeder cattle futures markets.
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