Market News & Headlines >> CFTC Findings on Block Trading
A study of “block trades” in CME Group agricultural futures and options found they do not appear to be fulfilling their intended purpose because they are occurring primarily in nearby contracts, but also found no rule violations, the U.S. Commodity Futures Trading Commission said on Monday.
During the first three months in which the CME Group allowed "block trades" in agricultural futures and options, 75% of those trades occurred in nearby contracts (futures expirations occurring in the next 90 days), the CFTC said. That trend runs contrary to industry expectations. The CME has said it expanded block trading in agricultural products to boost activity in thinly traded markets, including contracts for deferred delivery.
"The use of block trades in liquid contracts appears to conflict with the expectations set by the CME," the CFTC's report said. "The industry concern is that block trades are pulling volume from liquid contracts," the report said. However, the CFTC found after reviewing CME grain and livestock trading data from Jan. 8 to March 31 that block trades complied with CME rules requiring trades to be executed at a "fair and reasonable" price.
Block trades are privately negotiated futures/options transactions that are permitted to be executed off-exchange, often outside of normal trading hours, but are subsequently cleared by the exchange. Proponents of block trades say the transactions help them execute large orders without disrupting prices in thinly traded markets. Opponents say they hurt price transparency and take liquidity away from the “central limit order book” – the system used by most futures exchanges for matching orders (bids and offers) on “price time priority” basis.
The CFTC noted that “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”. The CFTC found no evidence block trades were displacing total agricultural futures/options volume, saying it “observed no increase in block trade volume relative to total volume”.
The CFTC said it would continue to monitor block trades for examples of lost liquidity in nearby contracts and for block prices falling outside the normal range of trade.