The effect of pit closure on futures trading

Abstract

and Esen Onur is an Economist at the U.S. Commodity Futures Trading Commission. The research presented in this paper was co-authored by Eleni Gousgounis, a CFTC limited term-consultant, and Esen Onur, who is a CFTC employee, in their official capacities with the CFTC. The Office of the Chief Economist and CFTC economists produce original research on a broad range of topics relevant to the CFTC's mandate to regulate commodity future markets, commodity options markets, and the expanded mandate to regulate the swaps markets pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. These papers are often presented at conferences and many of these papers are later published by peer-review and other scholarly outlets. The analyses and conclusions expressed in this paper are those of the authors and do not reflect the views of other members of the Office of Chief Economist, other Commission staff, or the Commission itself. All errors and omissions, if any, are the authors' own responsibility. The Effect of Pit Closure on Futures Trading Motivated by CME's decision to close down most of the futures pits in July of 2015, we analyze the changes in a number of important CME futures markets between 2012 and 2016. We find that although futures pit trading has been diminished to very low levels, it has not completely disappeared. While we do not have evidence of futures pit traders transitioning to the electronic market, we see that some futures pit traders are still active in options pit markets. When we explore the changes in daily trading patterns, we observe a shift in the timing of trading hours for a few select markets. In terms of execution costs, we do not observe any definitive effect of the pit closures on execution costs for most commodities in the electronic market. However, effective spreads for random length lumber futures appear to increase around the time of the announcement of the pit closures. A similar effect is observed for trading strategies in treasury futures during the roll periods.

Measuring price discovery between nearby and deferred contracts in storable and nonstorable commodity futures markets

“…The corn market remained relatively stable during 2015, providing a good opportunity for identifying changes related to the pit trading closure. Consistent with Gousgounis and Onur (2018), we create a dummy variable that equals 1 after February 4, 2015 when the closing of pit trading was announced for corn. Commodity index funds have increased investments in commodity futures markets (Irwin & Sanders, 2012).…”

“…Consistent with Gousgounis and Onur (2018), we create a dummy variable that equals 1 after February 4, 2015 when the closing of pit trading was announced for corn. 10 Commodity index funds have increased investments in commodity futures markets (Irwin & Sanders, 2012).…”

“…This period is characterized by a growing relevance of electronic trading in agricultural commodity futures markets. The electronic platform's shares of corn and live cattle futures trades were about 80% and 10% at the beginning of 2008 (Irwin & Sanders, 2012), and both rose to over 95% in July 2015, after which CME closed pit trading (Gousgounis & Onur, 2018). The period examined also includes pit trade closure, price boom–bust cycles, as well as periods when the markets were inverted, that is, when the price of deferred futures contracts was lower than the price of the nearby contract.…”

The components of the bid‐ask spread: Evidence from the corn futures market

“…We filtered the data to ensure that the trading volume in the BBO data set (containing only transactions that occur on Globex) was greater than 50% of the volume reported by the Commodity Research Bureau for that day. Although Globex's share of volume steadily increased during our sample period, the day‐to‐day share is highly volatile (Gousgounis and Onur, ) . Finally, days on which prices were locked at the exchange's daily price limit were dropped, since there was not sufficient variation on these days to perform estimation.…”

Market Uncertainty and Sentiment Around Usda Announcements

“…First, financial and agricultural markets have evolved massively over the course of the past two decades. Changes that could materially impact the manner or the extent of market reaction to USDA news include the growth (and, later, the dominance) of electronic and high-frequency trading (Haynes et al 2017;Haynes and Roberts 2015); the demise of the futures trading pits (Gousgounis and Onur 2018); and, the influx of private forecasting services A. M. McKenzie 2008) The datasets in the two extant studies, however, date back almost two decades 2 or more-to a time before any of those developments took place.…”