ICE to have authority to adjust softs trade prices

NEW YORK (Reuters) - ICE Futures U.S. (ICE.N) will increase its ability to adjust trade prices in softs futures, the latest in a series of changes it has made to deal with volatility in its coffee, cocoa, cotton and sugar markets.

The amended rules will be effective July 1 and follow a series of changes to reduce unwarranted volatility in 2011, following the "flash crash" in equity markets in May 2010 that was exacerbated by high-frequency trading. In January, ICE delayed its attempt to mitigate cascading stops in the softs complex following feedback from market participants.

ICE will be able to adjust trades made in coffee "C", cotton No. 2, cocoa, frozen concentrated orange juice and sugar No. 16 futures contracts. It will do this if "the exchange determines the original price of the trade does not represent the market value of the specific futures or options contract at the time of the trade," a notice states. (Changes to ICE rules: r.reuters.com/gyf42s and r.reuters.com/hyf42s)

This is a revision to ICE's error policy and follows its November 1, 2010, amendment that gave the exchange the authority to adjust trade prices for electronically traded sugar No. 11 futures and options contracts.

The exchange also revised the way it will treat short-term price spikes for coffee and cocoa futures contracts, allowing it to adjust trades that are executed away from the equilibrium price, also effective July 1.

A short-term price spike is when the price of a contract moves in one direction and then the other within 90 seconds on a lack of news. There must be no apparent error that caused the volatile move, and the high or low end of the spike must be more than a specific number of points from the determined equilibrium price.

Last month, ICE expanded this level to 500 points, or $0.05, for the coffee "C" futures contract and stated that trades made at prices away from the equilibrium price by more than the number of points allowed for each contract will be broken.

For cocoa, the level is 150 points, or $150.

The revision gives ICE the option to, rather than break the trade, to adjust it to the equilibrium price, plus or minus the number of points specified for the market.

YEAR OF CHANGE

The exchange has grappled with how to reduce unwarranted volatility.

ICE bowed to the World Sugar Committee's complaints about wild price swings caused by what they called "parasitic" algorithmic traders. ICE turned on the implied matching engine, which makes a correlation between contracts and preserves the spread differential, for sugar No. 11 futures.

A week after the cocoa market saw its most volatile day on record in early March, ICE announced it was expanding the range in which trades cannot be canceled for cocoa and cotton futures.

Also this year, ICE increased the daily trading limits in the cotton market, made changes to more no-cancellation ranges and revised its reasonability limits in the softs complex.

(Reporting by Marcy Nicholson; Editing by David Gregorio and Lisa Shumaker)