Announcement Effects Under Evolving USDA News Release Policies · announcement to avg. volatility in the steady state S after news is incorporated (60-90 minutes after publication)

Announcement Effects Under Evolving USDA News Release

Policies

Michael K. Adjemian

University of Georgia Department of Agricultural &

Applied Economics

Scott H. Irwin

University of Illinois Department of Agricultural &

Consumer Economics

Preview

• The government and major domestic futures markets have altered the way public news about crops is shared• Real-time trading of USDA news (since 2012 @ CBOT corn)

• No more media in lockup (since 2018)

• Today, • (1) price discovery occurs more quickly

• (2) markets experience brief periods of elevated volatility at announcement time

• (3) the quickest to access and understand news likely benefit

• (4) media groups no longer enjoy publically-subsidized lockup-access rents

• (5) the removal of media from lockup hasn’t led to clear erosion of price discovery

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The government collects & shares a lot of data

• Thirteen principal statistical agencies—including NASS and ERS—together accounted for $2.3 billion in spending during FY 2017.

• The federal government believes that informing market participants reduces uncertainty and leads to more economic activity

• Lots of govt. data are highly anticipated by markets. For example:• BLS: Employment Situation• BEA: GDP estimates• EIA: Natural Gas Storage report

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Government crop data moves markets

• Many USDA announcements are highly anticipated by traders• They inform fundamental expectations, which affect commodity futures (and

cash) price levels and expected volatility

• Lots of research identifies these “announcement effects” by estimating how they affect daily prices changes, e.g.:• Sumner & Mueller (1989): seminal paper

• Adjemian (2012): impact depends on mkt conditions & is rapidly incorporated

• Dorfman and Karali (2015): non-parametric approach

• Ying et al. (forthcoming): announcement effects haven’t decreased over time

USDA news impacts commodity prices

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USDA Reports Update Trader Expectations

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Recent events altered the way markets absorb government crop news• Historically, USDA published these reports when markets were closed, and

credentialed press could access reports ~90 minutes early from secure room inside lockup• “Timeout” permitted digestion of complex news without active trading• Press in lockup prepared stories and data for paying clients

• The Chicago Mercantile Exchange (CME)/CBOT corn market expanded its trading hours in 2012• …to fend off a competitive threat

• Government did not to force ag markets to timeout for reports, but USDA shifted publication time to a period with normally more liquidity (noon ET)

Recent events altered the way markets absorb government crop news

• Now, markets react in real time as USDA news is published • Permitted observation of full price discovery process; censored

version before

• Concerns lodged by many market participants• Equity of access to news? No timeout means faster, non-

traditional traders could benefit

• Wild volatility swings? Can ag markets handle information shocks? (Many other markets trade government news in real time)

Lots of concerns expressed

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Trading halts

• Allow markets time to resolve transitory information asymmetries that arise after the announcement of important information • Traders can revise buy and sell orders once they have considered a report’s

implications

• Avoid some problems associated with shifting the normal distribution of informed trading (that raise transaction costs)• Bid-ask spreads widen on suspicion of asymmetric information, making trading more

expensive (Menkveld, 2016)• “Uninformed” traders may hesitate to initiate trades or submit smaller-sized orders

(Joseph, 2014)

• But they also introduce a structural lag into the price discovery process• Could encourage participants to trade elsewhere… Round-the-clock threat to CME is

what prompted it to expand trading hours in the first place

Price discovery of public news

• An announcement shock can be decomposed into two factors:(1) Effort to digest government news; what is the news?

(2) Discovery of the price implication of that news

• A halted market only permits the observation of (2); a continuously-traded market exhibits both (1) and (2)

• Public news can shift the ordinary distribution of “informedness”• For a short period of time, the fastest to gather and comprehend news are

the smart money

• Could lead to “run games” (Menkveld, 2016), and liquidity problems11

USDA prepares reports in “lockup”

• An interagency group at USDA generates reports; nobody can leave or contact outside world until they are published• Communication devices must be surrendered

• Ahead of the release, the official USDA report and press dispatches were entered into a virtual queue (until August 2018)• At publication time, the Department would flip an electronic switch

connecting lockup with the outside world. USDA report -> servers in Kansas City (in ~ 2 seconds); Press report -> local DC clients (milliseconds)

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Elimination of Timeout Made Press Access Valuable• Under a timeout, any difference in the speed that the USDA or press could

distribute data didn’t matter… Everybody had 2 hours to review

• When the timeout was eliminated, press clients, e.g., high-speed trading firms in DC, could get news faster than other members of the public• Media sold access to govt news at “ultra low latency speeds” = taxpayer-funded

economic profits/ rents

• Determining that this conflicted with USDA policy that all have equal simultaneous access to data, the Department removed media from lockup in 2018

Data & Methods

• Corn market daily price ranges from 1995-2019, and intraday “time & sales” data from August 2009 - February 2019; nearest expiration contract that hasn’t reached delivery period

• USDA report days: Grain Stocks, Plantings, Acreage, & harvest-period Crop Production

• Compare announcement day market conditions across regimes(1) Timeout; < 3/2012

(2) Real-time w/press in lockup; 6/2012 – 6/2018

(3) No Media: 8/2018 – 2/201917

Data & Methods• Daily: session price ranges

• Intraday: minute-level scaled volatility, the ratio of volatility near announcement to avg. volatility in the steady state S after news is incorporated (60-90 minutes after publication)• For trading minute m, date d, trading time relative to announcement t, and vector of

prices p

𝐻𝑖 − 𝑙𝑜𝑤 𝑚𝑑,𝑡 = 𝑚𝑎𝑥 𝑙𝑛 𝒑𝑑,𝑡 −𝑚𝑖𝑛 𝑙𝑛 𝒑𝑑,𝑡 ∗ 100

෫𝐻𝑖 − 𝑙𝑜𝑤 𝑚𝑑,𝑡 = ൘𝐻𝑖 − 𝑙𝑜𝑤 𝑚𝑑,𝑡

𝐻𝑖 − 𝑙𝑜𝑤 𝑚𝑑,𝑆

• Kolmogorov-Smirnov test for equality of distributions, by minute18

Kill timeout: What effects do we observe?• After timeout elimination, announcement days were more volatile

• More corn market volatility at announcement time, based on 2009-2018 data• Elevated volatility persists for 10-15 minutes, consistent with findings of Adjemian and Irwin

(2018), whose sample period ended in 2014• More uncertainty about news -> less precise/lower quality price discovery? Not necessarily: price

discovery during the timeout era was censored

• But price discovery occurs much faster: news is incorporated hours earlier in real time

• Corn market also appears to have a more difficult time distinguishing between more important and less important news• Most important news = abs(daily price change) > median abs(daily price change)

• Other findings• More price jumps near announcements, with wider bid-ask spreads (Couleau et al., 2018)• Wider bid-ask spreads and less market depth (Frino and Garcia, 2018) 19

Distribution of Price Ranges on USDA Report Days (1995-2018)

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Kolmogorov Smirnov test confirms higher session ranges during Real Time period: more volatility

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Ke

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ensity

0 5 10 15Percent Difference of Daily High and Low Prices Observed

Timeout Real Time

Distribution of Announcement Day Range Relative to Prior 5 Trading Days (1995-2018)

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Kolmogorov Smirnov test confirms higher session ranges relative to the prior 5 trading days during Real Time period: more volatility

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Ke

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ensity

0 2 4 6 8Announcement Day Range Relative to Range of Prior 5-Days

Timeout Real Time








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CBOT Corn Volatility Under Timeout (2009-2012)

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Express in Trading Minutes for Comparison

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Overlaying Timeout & Real-Time Markets

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No timeout = more volatility for a few trading minutes

News is incorporated faster without a timeout.

Avg. CBOT Corn Volatility @ Announcement

Avg. CBOT Corn Trades @ Announcement

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• Other findings• More price jumps near announcements, with wider bid-ask spreads (Couleau et al., 2018)• Wider bid-ask spreads and less market depth (Frino and Garcia, 2018)

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With timeout: More volatility for major news events

CBOT Corn: Distinguishing News Under Timeout

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No timeout: similar volatility observed in response to major and minor news events

CBOT Corn: More Difficult to Distinguish News w/o Timeout








Media got the boot: What effects do we observe?

• There is evidence of significant trading activity in the 2-second delay USDA identifies before information was available to the public

• Range of corn market prices (session high minus session low) on USDA releases following lockup change are not out of the ordinary• Many historical release day session ranges were higher than those observed

on announcement days following the lockup change

• No worsening of price discovery, but sample is SMALL

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0

500

1000

1500

2000

2500

3000

3500

4000

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Avg. Corn Mkt. Trading Volume in the 2 Seconds Following Official Report Publication Time

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- Timeout eliminated






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Ke

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0 5 10 15Percent Difference of Daily High and Low Prices Observed

Distribution of Price Ranges on USDA Report Days (Jan 1995- Jun 2018)

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9/30 GS

Feb 2019

Sep 2018

Oct 2018

Nov 2018

Aug 2018

Session ranges on report days after press removal not abnormally high

Distribution of Announcement Day Range Relative to Prior 5 Trading Days (Jan 1995- Jun 2018)

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9/30 GS

Feb 2019Sep 2018

Oct 2018

Nov 2018

Aug 2018

Session ranges on report days after press removal not abnormally high






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Timeout & Real-Time Markets

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+ Media removed from lockup

Volatility path is not elevated after media removed from lockup

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+ Media removed from lockup

Volatility path is not elevated after media removed from lockup

No media in lockup: they can’t extract rents

• Fastest to news are still the most informed… But the media is no longer the middle man• Now they can’t extract rents from taxpayer-subsidized early-access to news

• Govt. could auction “early-peek” permits to reimburse taxpayers…• But this is not consistent with USDA policy of permitting simultaneous public

access to news

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Thank you!

Contact me at:[email protected]

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mailto:[email protected]

Documents

Announcement Effects Under Evolving USDA News Release Policies · announcement to avg. volatility in the steady state S after news is incorporated (60-90 minutes after publication)