U.S. commodity markets have shrunk almost 9 percent since MF Global's collapse as farmers, investors and traders close out positions, according to a Reuters analysis of data that suggests there may be lasting effects from the industry's most disruptive broker failure.
While several different factors likely figured into the decline - including the seasonal year-end closure of trading books - the study provides the first evidence to show that smaller-scale traders who were MF Global's core customers may have been effectively frozen out of the markets.
It does not yet answer the bigger question: how many of these traders will return to the markets? Their capital may eventually be fully restored in the bankruptcy process as lawyers and regulators search for up to $1.2 billion in missing customer cash; their faith in the system may be harder to mend.
"You figure that the company at MF's height was one of the largest non-bank clearing firms in the world and they had a large chunk of the business," said Richard Ilczyszyn, a former MF Global analyst who is now chief market strategist and founder of iitrader.com LLC, a futures commodities broker in Chicago.
"People got iced out of the market, it's paralyzing."
In the six weeks since the bankruptcy of the most active broker in U.S. commodity markets, traditional hedgers - including physical producers, consumers and traders - have closed out positions in corn, crude, gold and other markets, causing the number of open trades to shrink dramatically. By contrast, big hedge funds and speculators remain as deeply invested as before the collapse, albeit with positions that indicate they are much less bullish on prices.
In the week ended Nov. 29, open interest - a measure of market size that represents the number of active futures and options contracts in circulation - fell below 10 million contracts for the first time since July 2009, according to Reuters calculations based on Commodity Futures Trading Commission futures and options data from 19 key markets.
A drop of 1.3 million contracts in the four weeks following MF Global's collapse was the sharpest such reduction in positions since November 2010, when prices slumped. Interest has marginally risen since the low last month, but is still about 1 million contracts, or 8.7 percent, under Nov. 1 levels, and down 3 million contracts from a peak in February.
COULD BE TEMPORARY
The collapse of MF Global, which had been the most active broker on New York's metals and energy exchanges and No. 2 in Chicago's agricultural markets, has knocked confidence in the commodity futures market, in particular in the biggest U.S. futures exchange operator CME Group.