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- Art Buchwald

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- Tyler Durden

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- Boondock Saints

Monday, October 17, 2011

HFT To Join The Metals Secret Society

Of course, before we are able to grab a hold of HFT and their behavior in equity markets, the group has targeted and will infiltrate (as if it hasn't already) commodity exchanges.  Many of us speculate that the third-party clearing houses are working with the FED to maintain lower prices and the appearance of no inflation.  Anyone who has done trading through the CME knows this first hand as margin requirements have been increased on a near regular basis this year.  Now the exchanges are going to let the HFT gang come right on in and tie right into the exchange.  We're not really sure what the hell Sanjeev Lakhanpal was saying but we'll deduce it was some HFT propaganda since there is not a clear thought: The underlying fundamentals of any particular commodity...will reassert themselves over the long run...this will create beneficial correlation features that will show up in even the simplest of portfolio analysis for all types of investors.  It sounds like the same old stuff....HFT will remove minute arbitrage opportunities which will in turn create even pricing and closer spreads with added liquidity leading to efficiently priced markets...yada yada yada.  Seems to us that the last thing the CME needs is another entity buying derivatives that hundreds if not thousands of investors have that lay claim to one metal which was inventoried from the back door delivery of the banks.  Be careful!  Now that HFT will be able to snap stop-losses and trip buy limits, expect the common man to be whipped out if he is not aware of the increased price volatility to HFT.  There is a way to trade around this group and a way to know with confidence when it is appropriate to set your orders WAY outside of the spot price.

From FinancialNews:
The announcement underlines the increasing desire among high speed trading firms, known as high frequency traders, to diversify into a range of new asset classes – the latest being commodities. 

High frequency trading firms use sophisticated algorithms to exploit temporary pricing differences across markets. The controversial practice, which has come under increasing scrutiny from regulators during the past 18 months, is expanding into new asset classes in response to increasingly competitive and challenging conditions in equities markets – its traditional stomping ground. 

Data from research firm Aite Group (see graph) shows that many high frequency firms are now pushing into the futures and options markets with, say traders, commodity derivatives a growing area of interest. 

Sanjeev Lakhanpal, a partner at Beach Horizon, a London-based trading firm that specialises in commodities, financial and foreign exchange markets, said: “Although commodities can be highly correlated with each other and other sectors like equities on occasion, the underlying fundamentals of any particular commodity market, which can be very different for each commodity, will reassert themselves over the long term. This will create beneficial correlation features that will show up in even the simplest portfolio analysis for all types of investors.” 

Winton Capital, a London-based proprietary trading firm that uses statistical analysis to obtain higher returns, and Man Group’s flagship hedge fund AHL are both active in commodities markets. 

Chicago-based marketmakers and hedge funds, including Allston Trading, Getco and Citadel, which are all highly active in the equities markets, also trade across global commodities markets. 

The increasing presence of high speed trading in global markets – with, according to Aite Group, high frequency trading accounting for 40% of European trading volumes – has put the sector under the spotlight of the UK, US and European regulators, including the European Securities and Markets Authority, the new pan-European financial regulator. 

Artur Fischer, joint chief executive at German exchange Börse Berlin, said that by expanding trading strategies such as statistical arbitrage into commodities products, high frequency trading firms can help hedge themselves against the risk of a regulatory crackdown in equities. He said: “Some of the regulatory punishments being discussed at the moment would be very detrimental for high frequency trading. But they can easily move into other asset classes.” 

Exchange response

As the CME’s announcement highlights, exchanges are responding to this growing demand. Next month, the London Metal Exchange, the largest metals exchange in the world, which offers trading in metals futures and options, will launch proximity hosting services to high frequency trading firms, providing high speed access to its LME select platform at Interxion’s London-based data centre and Equinix’s LD4 data centre in Slough. 

The LME has responded to growing demand for high speed connectivity to its matching engine from members who currently obtain connectivity to the exchange’s data centre via a connection provided by Savvis, a network connectivity provider. 

Glen Chalkley, deputy head of business development at the LME, said high frequency trading has now become “a big part of the market” at the exchange. He said: “A lot of producers and consumers trade our metals and over the years we have established ourselves as providing a reliable and credible reference price for actual metal. 

“This has attracted more players to the LME market, in the form of hedge funds, speculators and now high frequency trading firms.”
Chalkley said that the new service will allow its members to pursue cross-exchange arbitrage opportunities with markets such as the CME Group, which operates exchanges in Chicago and New York, the London-based derivatives market NYSE Liffe and Atlanta-based IntercontinentalExchange, an internet marketplace for trading futures, over-the-counter commodities and derivatives. 

Bob Giffords, an independent banking and technology analyst, said high speed trading could now exploit greater levels of depth in liquidity across commodities markets. He said: “There has been a shift of traditional investment funds taking large positions in the commodity and financial futures markets, the so-called massive passives.

As more financial traders move in, this should expand the opportunities for high frequency trading.”

Nevertheless, Lakhanpal of Beach Horizon said the specific characteristics of commodities markets, which tend to have wider bid-offer spreads and “more fickle liquidity”, create challenges for HFT firms. He said: “Commodities do not allow certain types of high frequency strategy."

Analysts say fear among politicians that the prices of commodities are already manipulated by so-called speculators will also make it hard for high frequency trading firms to linger beneath the radar in these markets.