In a speech earlier this month at the American Soybean Association’s Legislative Forum in Washington, DC, Commodity Futures Trading Commission Commissioner Bart Chilton discussed the influence of non-traditional speculative trading on price movement and new technology in financial markets that allows high frequency traders (those he called cheetahs) to be in and out of the market in a matter of seconds.
The commissioner pointed to a new species of traders he called the massive passives, which includes pension funds, index funds, hedge funds and mutual funds. These funds attract investors who could care less what a pork belly is used for or what a soybean field looks like, he said They are massive and have a fairly price-insensitive, passive trading strategy.
Indeed, records confirm that from 2005 to 2008, roughly $200 billion in new speculative massive passive money came into the commodity markets in the US alone.
Despite denials from some trading corners, he insisted that there is evidence that speculators can and do influence price. Oil and food sectors have been particularly impacted, he noted.
“I think there’s good evidence that excessive speculation is heating up the market and prices have gotten out of line as a result,” the commissioner said. “Rather than help to fairly discover and ‘make the price,’ these speculators ‘shake and bake the price’—up or down, depending on which side of the market they’re in.”
Commissioner Chilton noted that a new financial reform law has been enacted to address the issue by requiring manditory speculative position limits to prevent too much speculative influence. Efforts are now under way to put safeguards into place.
He devoted much of his time to the emerging technology of high speed, computer-generated trading and the need for a thorough monitoring program. With software designed to allow rapid trading in and out of the market, the commissioner asked participants who actually hold physical commodities if they thought it wise to hedge their risk in an environment in which a speculative position can be opened and closed in a matter of seconds.
Exchanges have welcomed these cheetahs because they provide a high volume of trades, which adds to their income and the market’s liquidity, noted the commissioner. However, computer software utilized by some exchanges often weighs the size of the trade in assigning the order of fill, which may or may not be the first or best bid or offer.
“If markets are going to be efficient and effective and less volatile, we need to cage the cheetahs,” he said. “I'm not saying they should be extinct, and overly burdensome regulations shouldn't endanger them as a species, but they need to be confined. After all, financial markets impact all of us in one way or another. Prices for everything from milk to mortgages are set in these markets.”
However, he said markets need to operate without the influence of traders merely trying to “prey upon infinitesimal market movements in order to survive and thrive in the trading kingdom.”
A range of policy reforms are needed, Commissioner Chilton contended, including testing of algorithmic programs before they go live, some type of pre-approval or accreditation process to ensure the cheetahs are who they say they are and not those interested in financial terrorism, kill switches to stop programs that go feral, and accountability for the cheetahs who do damage to markets and cost people money.
Commissioner Chilton’s entire speech can be found here.
Questions: With respect to futures and options markets, has the influx of non-traditional traders and high speed technology had a specific impact on your operations?
How have they influenced your decision making?
Is there any specific area of the supply chain that is more susceptible to these two new factors?