The April 8 outage stopped electronic trading in 31 agricultural
markets that influence global prices for food staples such as wheat,
corn and pork, and sent a flood of traders into CME's <CME.O>
normally deserted open-outcry futures pits to execute transactions.
The electronic trading platform handles around 95 percent of the
volumes in grain futures on a typical day, and market participants
have been in the dark about the cause of the failure, with CME only
saying a "technical issue" was to blame.
The unusual outage came from a technical fault that involved
"implied technology" systems, which can facilitate the execution of
spread trades, CME Executive Chairman Terrence Duffy said in an
interview this week.
The technology was trying to match trades electronically even though
trading was at a standstill because agricultural prices had dropped
by their maximum daily limit, he said.
Duffy, a former hog trader who is now CME's highest-paid executive,
did not specify which market fell by the daily limit. However, hogs
were the only market affected by the outage that traded limit down
on April 8, according to the exchange operator.
"Even though the market was at a limit and couldn't go any further,
the implied technology was going to look for a trade, even though
there was nothing there," Duffy said on the sidelines of the Milken
Institute Global Conference in Los Angeles. "So in return it kicked
out the system."
Lean hog futures have been volatile for months, with prices often
swinging by the daily limit of 3 cents per pound because of
uncertainty about the impact of a virus wiping out baby pigs in the
United States. Duffy's comments left questions about why the glitch
occurred when it did.
CME's "implied functionality" system allows market participants to
handle a spread as a single trade, rather than entering orders for
individual contracts, a company spokeswoman said.
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Implied technology is supposed to turn off automatically when an
agricultural product hits its daily limit, but "it did not turn off
in this particular situation," Duffy said.
The company would not elaborate when asked why the outage plunged
such a large swathe of electronic agricultural trading into
darkness. Traders have wondered why the glitch halted electronic
trading in the corn and wheat markets, but not in soybeans.
The outage began at 12:38 p.m. CDT (1738 GMT) on April 8 and was
fixed by 2:15 p.m. CDT (1915 GMT), according to CME. Livestock
markets resumed trading electronically at 2:30 p.m. CDT (1930 GMT),
by which time grain markets had already been closed for more than an
CME fixed the issue with the implied technology, Duffy said, calling
it "a bug in the system." The company is set to report first quarter
earnings on Wednesday.
(Reporting by Tom Polansek; editing by Andre Grenon)
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