Rapid fire computers | EU considering law to curb high frequency trading
GENEVA, Switzerland (Reuters) — Only one-third of commodity price moves are caused by news events, reflecting the growing role of high-frequency trading in steering prices, says a new study.
The study, co-written by researchers at the United Nations Conference on Trade and Development and ETH Zurich, may spur regulators who blame traders for price volatility.
High frequency trading involves rapid-fire computers that place thousands of bets within the space of a second.
“At least 60 to 70 percent of commodity price changes are now due to self-generated activities rather than novel information,” the study said.
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“In our view, this evolution partly reflects the development of algorithmic trading and of high frequency trading in particular.”
The study comes at a key time for the European Union, which is scrutinizing a law that puts curbs on high frequency trading.
The trading practice is thought to account for more than half of all U.S. equity trade volumes, but its role in energy and agricultural markets is less well understood.
Some blame it for a series of mini flash crashes in commodity prices, such as a $13 intraday plunge in oil prices in May 2011 and a sudden dive in Brent prices last September.
Supporters of high frequency trading say they bring much-needed liquidity to futures markets, helping to match buyers with sellers.
“Commodity markets are becoming very financialized and computerized,” said Vladimir Filimonov, one of the authors.
“They are becoming more susceptible to minor shocks.”
The paper studied data on oil, corn, soybean, sugar and wheat prices between the mid-2000s and last October.
It was selected as part of an International Monetary Fund forum, Understanding International Commodity Price Fluctuations, which was organized with Oxford University.
