Approximately six months in, worries about block trading on the CME have been overblown.
A new report conducted by the Commodities Futures Trading Commission’s Market Intelligence Division analyzed block trading which the CME first implemented in January 2018.
Block trading is, “privately negotiated futures/options transactions permitted to be executed away from the central limit order book and are subsequently submitted to CME Clearing.” The CFTC said in a statement.
“Prior to the CME’s January launch of block trading, the CFTC heard various concerns from some members of the industry – most importantly, that block trades could reduce liquidity from the central limit order book (“CLOB”) and could reduce price transparency.” The CFTC further noted in its report.
Instead, the CFTC found:
- 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.
- DMO staff observed no increase in block trade volume relative to total volume.
- Over 75% of block volume is in the nearby months.
- Almost 65% of block futures volume is being offset in the CLOB for the same contract expiration on the same day.
- Yes; they (block trades) are in compliance with CME rules.
The CFTC further noted: “In a recent Wall Street Journal article, the National Grain and Feed Association expressed a wariness ‘of increasing futures volume moving into blocks… [fearing] if volumes grow too large it could limit market participation, especially for relatively smaller hedgers.’ Three months is probably too small of a data set to determine if agricultural blocks add or subtract from total volume.
“However, the data shows that the number of block trades is not increasing and, the block volume and block share of volume are also not increasing. Of note, the large record block volume of almost 30,000 contracts on February 8, 2018 was primarily due to two large block corn spread trades. On this day, block trade volume was the highest percentage observed to date at 1.2% of total agricultural volume on that day, about 4% of the March corn volume, and 6% of the May corn volume. DMO staff will continue monitoring this situation and report any significant changes.”