STiR coffee and tea magazine

40 STiR coffee and tea / Issue 2, 2017 (April/May) The accelerating pace of trades and a desire for greater transparency, efficien- cy, and quicker settlement on delivery of robusta coffee futures contracts has prompted a number of changes in rules for trades on the Intercontinental Ex- change (ICE). Toby Brandon, ICE director of soft commodity operations, explains that con- sideration of these fundamental changes in pricing structure has been closely co- ordinated with coffee traders and ware- house keepers. He said the rules chang- es apply to robusta and London-traded cocoa and became effective in October 2016 for the July 2018 contract month. Brandon noted that futures contracts, by definition, require long lead times but coffee to fulfill those contracts is now growing on the world's farms, he said. Brandon traveled to Austin, Tex., to brief attendees at the National Coffee As- sociation's annual convention as part of an educational program to avoid a jarring transition. In 2014 ICE amended the maximum rent and load-out rate requirements for warehouse keepers and introduced a 60- day limit to complete load-out requests. Under the new rules "the future refer- ence point shifts upward to include free on truck," he said. Brandon said that the exchange can- not predict with certainty the value for pre- paid load-out until after July. "The market will decide," he said. Nothing prevents warehouse keepers from increasing rent, he said, "we are not sure how warehouse keepers will react," but the rules are structured to encourage efficiency in warehousing by rewarding pricing incentives to coffee deliverers who select less costly in store, he explained. July 2018 futures reference May 2018 futures reference $? (market driven) FOT PRICE (free on truck) FOB PRICE (free on board) FARMER PRICE (farm gate) DELIVERED FACTORY A IN STORE (warehouse) DELIVERED FACTORY B DELIVERED FACTORY C Changes to ICE Futures Robusta Source: ICE Intercontinental Exchange Brandon illustrated the price compo- nents in the diagram above. In summary, futures prices will now include pre-paid loading out charges in the price of the futures contract, along with an adjustment on delivery invoices to align with rent paid in the two-month pe- riod immediately following delivery. ICE publishes a global average rate for warehousing robusta. The rules also shorten from 14 days to 4 days the period between notice and settlement to stream- line the delivery process. Brandon reassured those attending the presentation that the changes "are de- signed to provide the coffee industry with the most effective tools for price discovery and to manage risk." ICE operates a global network of fu- tures, equity, and equity options exchang- es, as well as global clearing and data services. In addition to enabling trades on a modern digital platform the exchange provides hedging tools for coffee traders and producers to help them to manage their price risk associated with crop pro- duction, weather patterns, and changes in supply and demand. — Dan Bolton "Electronic trading has made the 9-day moving average more effective over the last 10 years," he said. New rules to limit the ability of one trader from viewing details about competing trade known as "icebergs" are beneficial. Stop/ limit market orders automated trade exits and auto-spreading allows more efficient spread execution, he explained. Front-end execution is instantaneous and audited to reduce trade breaks leading some traders to rely on technicals, he says. One benefit of open cry trading that is missing today is "the constant sharing of market information and discussion," he recalls. "News was vetted amongst all the market participants and contrarian trades moved on the spot," he said. In contrast, with emormous amounts of information on screen "things can be more opaque." IM (internet messaging), phones, and email are all relied on heav- ily which means rumors spread faster and moves can be more extreme," he said. He cited news scrapers as an example of technology that offers huge benefits– but not without serious drawbacks. Scrapers are a category of software that acts like a specialized version of Google by continuously scanning the web for the occurance of terms like "se- vere" "destroyed" paired with keywords such as "frost" and "Brazil." During his presentation Hawrylik displayed a word cloud with frost-relat- ed terms to illustrate what the machines "see" based on June weather reports. In this instance transactions were triggered by fears that were unfounded. Temperatures in Brazil remained above 34 degrees Fahrenheit (0 Centigrade). "They were forgetting the fundamen- tals," he said. Some traders rely almost exclusively on "black box algorithms." These "rise of the machine" transactions, known as "algo-trades", can easily exceed the num- ber of trades initiated by retail investors with the ability and experience to gauge economic factors. They may be slower to act, but "pa- tience in considering a trade rarely comes back to bite you," he said. All this points to the fact algorithms are arguably the biggest players in the market today, he said. Event the best algo- rithms must be monitored and constantly modified, but automation has brought "huge benefits," he concluded.

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