CME's Futures Pits Closure: What It Means for Dairy Trading

Dairy futures turn to electronic trading, but dairy options will continue to trade in the pit for a while longer.

For trading dairy futures, computers have replaced humans in the open outcry pits of the CME floor in Chicago, but that transition doesn’t affect the fundamental role of the marketing exchange, say dairy traders.

“The exchange is set up as a risk-transfer mechanism for farmers and producers, and that function will not change,” said Chris Robinson, a trader with Top Third Marketing who spent much of his career as a Chicago floor trader and broker.

The dairy sector has already said good-bye to the open outcry pits once dominated by humans using baffling hand movements and raucous shouting,

“Almost all dairy futures trade electronically and not in the pit, so this has limited impact on dairy futures trading,” said Will Babler, a principal with Atten Babler Commodities LLC, which provides futures and options brokerage services to dairy producers and processors.

CME Group, which operates one of the world’s largest futures market exchanges, announced Wednesday that it will close most of its futures trading pits in Chicago and New York by July. Open outcry futures trading has fallen to just 1% of the company’s total futures volume. The rest is handled by an electronic trading platform.

The closure comes as no surprise to market traders, who’ve watched the human action in the pits dwindle over the past 15 years.

The open outcry pits of the CME floor in Chicago are nearing their end.

“It’s been a long time coming,” said Robinson. “But it’s sad to see a tradition, which started in 1848, come to an end.”

Dairy options, which trade both electronically and in the pits, will continue to require human beings in the open ring. Computer algorithms have not been perfected for the options market due to the myriad of combinations that are available. “One day, those options pits will also be shuttered,” Robinson said. “For now, however, they are still more efficient than the computers, so they remain open."

As a trading and hedging marketplace, the CME will remain the place where the commodities world comes to manage risk.

“Market efficiency and market integrity will remain robust," said Robinson. "That’s one thing producers must understand. This is the place to come to protect your bottom line by transferring your risk to a third party.”

Babler agreed. Liquidity in dairy futures and options continues to grow, and “there is tremendous capacity for risk transfer opportunities,” he said.