Are Market Makers on the Board Really Out to Get You?


Many farmers can’t get away from that niggling feeling that traders on the Chicago Board of Trade exists primarily as a middleman skimming fees on the backs of farmers and enabling disadvantageous hedge fund behavior.  Over the course of my career in ag, I’ve had many a conversation with farmers about how they feel about traders that only speculate on the Board. (And when I say speculators, I’m primarily talking about managed money, hedge funds, market makers, or anyone assuming the risk of the market to make money.) Many in ag feel that, bottom line, speculators always put farmers on the short end of the stick of a trade.


Full disclosure: before becoming a TFM advisor, I was a market maker at the Board of Trade and then a merchandiser at an elevator. And, by the way, you’re right – speculators at the Board DO hope to make money off the grain you produce through each and every transaction that uses a grain contract. Yet are speculators – specifically market makers – on the Board really making money at the expense of farmers? And do they offer anything TO farmers and other market participants?



How Does the Board Provide a Marketplace?


For many, just knowing that speculators are trading through the Board is enough to avoid trading futures and options at all. Last July, August, and September we discussed how hedge funds and managed money benefit farmers. Does this hold true for market makers? Perspective on the role of market makers on the Board might help you feel more comfortable about making a trade.

  • For context, there are two main types of traders at the Board: hedgers and speculators. Hedgers are there to transfer risk; speculators are there to assume risk.
  • There are many types of speculators, and all provide some level of liquidity in the market. Market makers provide the most liquidity.
  • Market makers constantly buy and sell at the market price. Their objective is to make a fraction of a cent per transaction by buying the bid and selling the offer.
  • Because their biggest risks are time and market volatility, market makers do not want to sit on a long or short position for any real duration. Instead, they want to end any day neutral.
  • The role of the market makers keeps the Board efficient and provides all participants the ability to get in and out of the market.

Because of the activities of the market makers at the Board of Trade, market prices reflective of supply and demand can be made for your production regardless of location and, within parameters, timeframe. And here’s the deal – even if you as a farmer never personally trade through the Board, your prices are still affected by the Board prices.

It’s important to know that participants in the market – the buyers, the sellers, the processors, and everyone in between – all share similar goals of managing risk, whether it’s the risk and opportunity of prices or the risk of not having grain when they need it. To manage that risk, they need the liquidity that the market makers at the Board offer. Whether a buyer or seller, the ability to offset your Board position at a moment’s notice gives confidence and a mechanism to build a favorable price.



How Do Market Participants Use the Board?


As we discussed, participants in the market use it for access to product and risk management. Let’s walk through how market participants use the Board to help make smart, profitable business decisions.



Did you notice that almost every type of market participant uses futures to manage their opportunity and risk? Like it or not, you’re already in the market with everyone else, as the Board prices are a fundamental factor in determining the cash prices. The question is whether or not you’re using the Board to manage your own opportunity and risk.



Futures and the Futures Market Are Useful Tools (Regardless of What You Think of Traders)


So, let’s get back to the original question. Are market makers on the Board out to get you? Would you be surprised to hear that every market participant kind of feels that way? And the answer for everyone, truly, is no. Market makers at the Board are rewarded for moving orders at prices that reflect what the market offers; they avoid taking on the real risk of market gains or losses given the amount of volume they take on. Furthermore, they don’t really think about – or know – or need to know the face of anyone initiating any transaction, including the origination of the grain or the positions someone had on before their last trade. They’re worried about filling orders, making sure the market works smoothly and efficiently, and getting back out of a position without taking on market volatility.


With the amount of responsibility (and volume) I faced to do my job back when I traded as a market maker, I took a page from a mentor of mine: look at what was in front of you and deal with it. That approach could also apply to other participants in the market, like you.  Accept that, on balance, the Board offers opportunities that would not otherwise be there. Think about how buyers and sellers use the futures market to manage their own risk and price. Think about the clear advantages you have as a producer – you have grain in the field to cover positions you place on the Board. That puts you at a unique position that other market participants can’t enjoy.


Yes, the futures market can feel dangerous and tricky. That doesn’t change the fact that you are in the market, whether you manage your price risk or not. With that in mind, think about your business and financial strategy and the steps you can take to manage the price you get. Work with someone trustworthy and knowledgeable like the advisors at TFM to help use the futures market to your advantage.



Total Farm Marketing Can Help


For almost 40 years, Total Farm Marketing has helped farmers be successful in any market condition.

We can help you set up a plan that prepares you for whatever the market does rather than on what you hope it will do.


Give us a call at 800.334.9779 to learn more.


©July 2024. Total Farm Marketing. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices may have already factored in the seasonal aspects of supply and demand. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Total Farm Marketing and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing refers to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. A customer may have relationships with any of the three companies.


Scott Masters

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