May 20, 2016
DICKINSON — The earthy smell of a livestock ring is perfume to cattlemen, unlike the odor of unseen money traded by guys in suits and ties a long ways from the sales barn.
It’s called high-frequency trading, driven by computer programs that capture vacillations in the market in milliseconds and can leave the hard-working rancher who brought in a load of cattle that day wondering what hit him.
Sen. Heidi Heitkamp, D-N.D., brought a panel of cattle and market experts into the Stockmen’s Livestock sales ring in Dickinson to talk about it Friday, attracting more folks in boots and cowboy hats than might show for a weekly sale.
The problem is that the industry went from an all-time high market a year ago to major slippage since, down by nearly half in months marked by extreme volatility and more than 30 occasions when the market hit its daily limit and trading came to a halt.
Larry Schnell, owner of the livestock barn, said ranchers can deal with the fundamentals of the industry, the droughts and the supply-demand equations that affect the cattle market. But the high-frequency trading that floats over the entire market is a force that has nothing to do with those basic fundamentals is something else altogether, he said.
“That’s why it’s so hard to accept the consequences for all the trading under the table and in the dark,” Schnell said. “They’re gaming the situation, and it’s about time we found out what to do.”
Fred Berger, a cattle buyer, told the audience about a sale last week at Herreid Livestock when futures trading that kicked in the daily limit cost sellers $20 a hundred-weight in three days.
“There was a $1 million loss on that sale,” Berger said.
Heitkamp said, without a cow in the picture, the whole situation is no more than gambling. She turned to the Chicago Mercantile Exchange, the DOW of cattle and the only market trader in the country for insights and answers.
The exchange’s managing director, Dave Lehman, wearing the only suit jacket in the building, said the exchange recognizes the problem and is taking steps to fix it. He said the volatility is backing off on its own, slightly, with trading volume down 5 percent and only a handful of days this year when the market hit its daily trade limit.
Lehman reminded the audience that the industry itself moved to electronic trading, not the mercantile.
“We closed the trading pits when there was no trading in the pits,” said Lehman, adding that there is no going back, but going forward things could be better.
He said the mercantile will set circuit breakers on the cattle market, automatically shutting it off any time it moves $1.50 in the live market and $2.25 in the feeder cattle market.
“Anytime it moves that much in an hour or less, the market halts for five minutes. We think that will let the market understand what’s going on,” he said.
The circuit breakers could trigger multiple times in a day and on one extremely volatile day — Sept. 15 — the breakers would have triggered 11 times had they been in effect, he said.
To prevent price cascades, the mercantile is fining traders who inject more than 20 messages into a trade and Lehman said that limit has already achieved a 15 percent decline. The mercantile is also eliminating the overnight trade session, he said.
He said the mercantile needs cattlemen’s trust to work effectively and he urged support for the circuit-breaker concept, new to the cattle industry.
“We hope it will slow things down and allow more rational trading,” he said.
Heitkamp said cattle ranchers need a marketplace that works for them, in good times and bad.
“We have a right to be suspicious … of a high-frequency trader that you don’t know driving the trade,” she said.
Herman Schumacher, a feedlot trader from Herreid, S.D., said there’s not a lot of logic in the cattle market now.
“Ranchers are seeing their livelihood destroyed by the futures market. At the same time, we’re getting our hind ends handed to us, the retail prices are going up," he said.