For those who love adrenalin and the chance to make a month’s pay in 20 minutes, these are good times in the commodity markets.
“There was an 84 cent range in soybeans yesterday …. If you’ve got the right numbers in front of you, with that kind of range you can get in and get out and make some money,” said Stephen Davis, a broker with RJO Futures in Chicago, Illinois, referring to the price range Aug. 19 on the Chicago Board of Trade (CBOT).
This volatility, seemingly now the norm in agricultural markets, presents an incredible opportunity for day traders. However, it’s also changing how the markets operate, said Ken Ball, a broker with Union Securities.
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Ball estimated that speculators taking positions for two hours or less now represent 70 percent of the daily trade volume in certain markets.
“You can make (or lose) as much money in five, 10 minutes as used to take a week or more,” he noted.
The effect of this daily opportunity, Ball said, is that long-term forecasts have become old-fashioned and unnecessary.
“There’s no longer any need to try and forecast, for example, where beans will be in December. We don’t need to know that. All we need to be able to do is feel and anticipate the pressures that are building today. And go with those pressures and flows,” he said.
With the psychology of now, now, now dominating the market, it creates an urgency to cash out in a hurry, Ball said.
“Whenever you get a modest to good profit, you must grab it immediately. Don’t try to overthink it because the odds are so high that the market will take it back,” he said.
Asked if the short-duration speculators are causing the market volatility or simply taking advantage of it, both Ball and Davis were reluctant to point the finger directly at day traders.
New money from various fund traders has increased volume and liquidity in the markets, which is beneficial for most market players. Ball, however, added that day traders’ behaviour might be a factor.
“Traders will start to trade more and more contracts, knowing they’re just going to be in the market very briefly,” said Ball, which is a way to maximize profit and could exacerbate short-term price swings.
A more powerful force of change in the markets, is the move from the trading pits to the computer screen, said Davis.
“These markets have changed more in the last two years than they have in the previous 20 years,” he said.
Ball agreed, and pointed to statistics indicating how electronic trading has taken over the markets.
Total volume in CBOT corn, for example, was 161,000 contracts Aug. 20. Out of those trades, Ball said, 131,000 were electronic and only 16,000 were pit traded. The remainder was exchange for physicals.
Ball said the shift to the computer means that only dedicated traders can play the market effectively.
“A lot of the traditional players (like producers) aren’t playing now, because to play this kind of game you almost have to be sitting full time, second by second, in front of a live quote screen,” he said, noting that farmers have other things to do besides hunching over a computer for six hours a day.
Although market commentators and brokers may believe this is a new era for commodity markets, and the most volatile period in the history of trading, Dwight Sanders is not convinced.
Sanders, a professor of agribusiness economics at Southern Illinois University, said people forget that markets have been volatile in the past.
“It (volatility) is higher than we’ve seen in the last 10 years. But I don’t know that it’s necessarily any higher than in the late ’70s, when we had a very volatile political environment and a volatile commodity environment,” he said.
