High Frequency Traders Manipulating Food Prices? The Issue Is Not Settled.
The CME Group is imposing a procedural change in June of 2012 that will drastically and negatively affect food pricing. If this happens, it will lead to the very swift end for open-outcry in food futures and mark the beginning of a new chapter in market manipulation by computer programs. A movement, Protect Ag Futures and Save the Floor, Inc, to stop this change has developed on the trading floors consisting of futures commission merchants, traders and brokers in the grain and livestock futures pits, and it is spreading to customers outside the exchanges.
The Wheat Futures and Cocoa Futures markets have already experienced this devolution as producers and end-users frustrated by non-transparent, illiquid markets dominated by computer trading programs have left those markets. They little resemble the underlying product or the fundamentals of supply and demand thereof. Currently the settlement price for Agricultural futures is discovered “in the pit” via open-outcry as it has been successfully for over 150 years. However, there is a small, powerful lobby of high frequency trading (HFT) firms, called the Principal Traders Group, which is trying to do to Ag commodities what they have done to the equities markets: dominate and manipulate.
For proof of this there is no need to look further than very recent studies and articles pointing to the negative impact HFTs have on markets. See Reuters article 4/20/12 “High Frequency Trader Optiver pays $14M in oil manipulation case”. There is mounting and substantial evidence that supports the case that HFTs cause price distortion in food and energy markets as seen in the United Nations Conference on Trade and Development’
“The strategy of those involved in high-frequency trading tends to reinforce the correlation between equities and commodities. As commodity markets become more financialized, they are more prone to external destabilizing effects. In addition, their tendency to deviate from their fundamentals (of supply and demand) exposes them to sudden and sharp correction.”
The Commodity Futures Trading Commission has assembled a Technology Advisory Committee and subcommittee comprising heads of several high frequency trading firms in order to define what HFT is, what its role is in commodities markets and how to regulate it. The subcommittee weighs heavily in favor of the very group in question. As members of CBOT and CME, we are extremely concerned about HFTs dominating our food markets. We fear that our delicate hedging instruments, used to price food for the world, will suffer great consequence as in the case of the stock market flash crash on May 6, 2010 and much worse.
All markets are not created equal. Agricultural futures were created back in 1848 to allow producers to hedge against price fluctuations. The structure of these hedging mechanisms relies on intelligent information flow from real market players (producers and end-users), not artificial information from super computers and algorithms using phantom orders. And because these markets are rooted in food commodities, they should be determined strictly on fundamentals of supply and demand as the amount of food available at any given time is finite. They should not be determined by mathematical equations as in financial markets, which are rooted in formulas to begin with.
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Brett Simmons (773) 636-1969 email@example.com
Heather Koch (312) 593-4119 firstname.lastname@example.org
Kelly King-Taylor (312) 388-6298 kly@ProtectAgfutures.com