If it's a bad idea to play with matches, it's worse to play with a blowtorch in a fireworks factory.
That's what farmers and ranchers do when they price cattle, corn and cotton in markets dominated by “high-frequency trading” (HFT), trading driven by computers running algorithms done by money managers who don't know cocoa beans from soybeans.
These freaks of finance, blogger Tyler Durden said on the Zero Option website Oct. 2, “stuff quotes, front run each other, spoof, layer and … make a mockery out of the thing … known as the market.”
That these fast, huge, mostly unseen and speculative trades move markets is no secret; more than 100 recent studies have shown them as the main driver in today's price moves.
Banks, Big Agbiz and traders are greasing every skid in Washington to ensure every attempted regulation of this Big-Boy-in-the-Dark game will be fought in Congress and challenged in courts. Money nearly guarantees success in the fight.
First, high-frequency trading now generates big revenue for futures exchanges. The financial services company Raymond James says about 32 percent of all 2011 revenue at the Chicago Mercantile Exchange came from HFT.
HFT is giving billions in exchange and trading profits to the money hawks while delivering less safe, stable and efficient markets to you and me. On Oct. 16 the Wall Street Journal told of the latest version of the HFT game, recent hard-to-explain prices in the natural gas futures market. Called “banging the beehive,… high-speed traders send a flood of orders in an effort to trigger huge price swings just before the (government's weekly gas supply and demand) data hit” the market. The cost to this fake market-making is measurable.
If you think someone should do something about this madness, someone is.
Under Dodd-Frank financial reforms, says Senior Policy Analyst Steve Suppan on the Oct. 10 “Think Forward” blog at the Institute for Agriculture and Trade Policy, the Commodity Futures Trading Commission has “set limits on … commodity contracts (that) can be held by any one entity and its affiliates … to reduce or prevent financial speculation in excess of the liquidity needs of the commodity producers.” Those rules were to be in place Oct. 12.
On Sept. 28, however, U.S. District Court Judge Robert Wilkins declared the CFTC had “misinterpreted” the Dodd-Frank mandate. He “nullified the rule,” Suppan says.
Suppan says the Wilkins' ruling effectively kills new oversight of high-frequency trading and its hand-in-glove partner in market volatility, unregulated over-the-counter derivative trading. (Supporting info is at www.farmandfoodfile.com.)
That's great news to Big Agbiz and bad news for anyone who relies on open, transparent markets. When only a few major players have better or more complete market information, the many who don't are sure to be skinned. And we were in 2008.
Since that derivative-driven global market crack-up, other market scandals have cost you and me billions – MF Global, Peregrine Financial, the banker-cooked London Interbank Offered Rate to name the big ones. Without new trading rules, more are certain to come.