Global markets: High speed crazies

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If it’s a bad idea to play with matches, it’s an even worse idea to play with a blowtorch in a fireworks factory. And yet that’s just what farmers and ranchers do every time they price their cattle, corn, cotton and other commodities in global markets dominated by “high frequency trading,” trading driven by computers running algorithms developed by money-managers who don’t know cocoa beans from soybeans and don’t care.

These supersonic freaks of finance, blogger Tyler Durden explained on the Zero Option website Oct. 2., “stuff quotes, front run each other, spoof, layer and generally make a mockery out of the thing formerly known as the market.”

No secret

That these lightening fast, fabulously large, mostly unseen and nakedly speculative trades move markets is no secret; more than 100 recent academic and government studies have fingered them as the main driver in today’s neck-breaking price moves.

Nor is it a secret that banks, big agbiz and traders are greasing every skid in Washington, D.C. to ensure every attempted regulation of this Big-Boy-in-the-Dark game will be fought in Congress and challenged in federal courts.

Three items nearly guarantee their success in this fight: money, money and money.

First, high frequency trading now generates enormous revenue for futures exchanges. According to the financial services company Raymond James, nearly 32 percent of all 2011 revenue at the Chicago Mercantile Exchange came from HFT. On the New York Stock Exchange, HFT was tied to 21.4 percent of all 2011 revenue, on the Nasdaq 17 percent and the on Chicago Board of Options, 22.4 percent.

As such, HFT, regardless of its danger, is a cash cow that provides billions in exchange and trading profits to the money hawks while delivering less safe, less stable and less efficient markets to you and me.

The Wall Street Journal chronicled the latest version of the HFT game Oct. 16 — 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 (federal government’s weekly gas supply-and-demand) data hit” the market.

The cost to this fake market-making is measurable. “(I)ncreased action … is spooking some veteran traders. That could leave the market reliant on computerized trading and potentially reduce liquidity.”

Taking action

If you think someone should do something about this madness someone is. Under Dodd-Frank financial reforms, writes 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 CFTC 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,” notes Suppan, and essentially ordered the CFTC to conduct a cost-benefit analysis of it.

Suppan believes 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 documents are posted 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.

Scandals

Since that derivative-driven global market crackup, 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.

Call me crazy, but everything about these high speed crazies demands more regulation, not less, and Congress needs to support the law it passed, Dodd-Frank, before we’re all, again, just a bunch of beaten-up bees.

About the Author

Alan Guebert was raised on an 800-acre, 100-cow southern Illinois dairy farm. After graduation from the University of Illinois in 1980, he served as a writer and editor at Professional Farmers of America, Successful Farming magazine and Farm Journal magazine. His syndicated agricultural column, The Farm and Food File, began in June, 1993, and now appears weekly in more than 70 publications throughout the U.S. and Canada. He and spouse Catherine, a social worker, have two adult children. farmandfoodfile.com More Stories by Alan Guebert

2 Comments

  1. Woody says:

    Folks: “back in the day” when people actually worked for a living on Wall Street, trading was done by ticker tapes, telephones, and messenger boys.

    Earlier this week there was a story about this HFT, defined as a mathematical formula which can make trades in millionths of a second, second after second with “buys” and “sells” trying to make money based upon this light-speed agitated trading. Only problem: this math “algorithim” which the traders paid millions for, actually took on a life of its own, went berserk, and wound up costing one Wall Street firm $400 million in lost revenue in a few minutes.

    Think about that: $400,000,000.00 lost in seconds.

    NOW–think about a corrupt system that can allow this to happen!

    Wall Street now is pure speculation. Better to go to Vegas–at least you can watch the croupier take you money while at the dice game and they give you free booze and food.

    Laws against this? Yeah–right. Notice how many prosecutions against this. Like winter in Ohio–below zero!

    GREED AND CORUPTION rule.

  2. Woody says:

    My point: Knight Capital, an obscure brokerage, lost $390 million in under a minute when it switched on its new computerized trading system a few months ago.

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