• QA 133
    Is electronic trading of Coffee 'C' futures being introduced and, if so, what impact might this have?
    We are hearing of a new electronic exchange being set up in New York. Do you have any details and do you think this will have any impact on coffee market?
    Asked by:
    Processor/exporter - India

    Yes, electronic trading of Coffee 'C' futures is to be introduced but it is too early to assess the impact thereof, if any.

    Following the merger of the New York Board of Trade (NYBOT) with Intercontinental Exchange (ICE - www.theice.com )  in January 2007, it was announced that on February 2nd 2007 ICE and NYBOT will introduce the electronic trading of six NYBOT soft commodity futures contracts, including coffee, alongside the existing open outcry trading. We suggest you visit www.nybot.com and look at the information available there. Meanwhile though…

    Information available on the NYBOT website confirms there will be no change to the existing Coffee 'C' contract: the electronic contract is exactly the same as the present open outcry one. This means, for example, that traders will be able to initiate a position electronically and liquidate it via an open outcry trade, or vice versa. In other words, the open outcry and the electronic contracts are fully fungible. That is, they are the same in all respects and fully interchangeable.

    On February 2 2007 electronic trading of Coffee 'C' will commence at 07.00 am US Eastern Time, ending at 15.15 pm US Eastern Time. It is expected that, in due course, these trading hours will be extended to perhaps as much as 22 hours each trading day. The open outcry (or traditional) trading of Coffee 'C' futures will continue as before, from 09.15 am to 12.30 pm, again US Eastern Time.

    The other important point to note is that the daily settlement price* will continue to be determined at the close of the daily open outcry session, i.e. in exactly the same manner as before. This means that all open positions will continue to be marked-to-market each day using this settlement price, regardless of whether the position was initiated via electronic or open outcry trading.

    We cannot speculate on the impact, if any, this may have on coffee trading: only time will tell. It seems reasonable to assume though that liquidity may increase as more and new operators join in through electronic access. Increased liquidity may in its turn bring increased volatility. For example when trading takes place in thin volumes during 'quiet hours', particularly if in future electronic trading hours are extended as currently suggested.

    What we can suggest however is that exporters who sell 'Price To Be Fixed or PTBF'** against the New York Coffee 'C' contract should agree the price fixation policy with their buyers at the time of concluding a contract. That is to say, define clearly with your counter party the time period when price fixation can take place.

    * The price that is established for each trading position at the end of each day's open outcry session.
    ** For more on PTBF see section 09.02 of the Guide.

    Posted 01 February 2007

    Related chapter(s):
    Related Q & A:
    QA 051, QA 054