We at Themis read a lot. We read SEC/SRO rule filings. We read Barron’s. We read the NY Times and the WSJ daily. We read the New York Post Business Section. We read Zero. We read FT Trading Room and Alphaville. And of course, we read the Drovers Cattle Network – which is where we came across an article titled High Frequency Trading Distorts Commodity Prices. This article discusses how disruptive high frequency trading has been to the commodity markets, including oil, coffee, sugar, and cattle. Yes. Poor freaking Bessie is being passed around by “market makers” at speeds that she is quite not accustomed to traveling. The “financialization” of these markets (which used to be dominated by farmers to hedging purposes) has resulted in real harm to the heartland, and the HFT article in Drovers highlights it.
The article discusses a United Nations Conference on Trade and Development (UNCTAD) study that has studied tick prices in the futures markets between 1996 and 2011. It concludes that “the financialization of the commodity markets has impacted the price determining process.” This has had two effects, according to UNCTAD:
1) Correlation between commodities and equity stock prices has sharply risen.
2) As commodity trading has become dominated by speculators, they are more prone to destabilizing effects.
Would you like to read more, but instead from multi-decade veterans of our markets who are experts in trading commodities (which, like it or not, in today’s markets are highly tied to equities), as well as from Wall Street?
Better Markets CEO, Dennis Kelleher has been sounding an alarm about how commodity index funds have been harming the commodity markets with our regulators, as well as in the media (Dylan Ratigan MSNBC). And of course Better Markets was founded by Mike Masters, renowned investor, and expert on commodity markets.
Unfortunately the industry has been doing an increasingly poor job of self-policing and regulating itself, in nearly all markets, and especially with regard to HFT. Its myopic short-term focus has left the equity market barren, and threatens other asset classes not prepared for their domination. The effect of course is $5 boxes of Cheerios and $5 gas.
Please bookmark the Better Markets Website.