HFT Banging the Natural Gas Beehive

High frequency trading gets knocked – and defended – on a regular basis these days. So far, we haven’t come down on one side or the other, largely because HFT has primarily been a phenomenon in the stock market, and not really a concern for managed futures. And, as a recent New York Times article argues, its impact on stocks may already be waning, since HFT profits have been shrinking recently.:

Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities. By comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn this year.

While no official data is kept on employment at the high-speed firms, interviews with more than a dozen industry participants suggest that firms large and small have been cutting staff, and in some cases have shut down. The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.

Is this an indication that the “easy money” to be made by HFT has already been made? Now that the big firms are viciously competing with one another for every fraction of a penny, is the next phase going to one of consolidation and shrinkage in the industry? Perhaps. Or perhaps not, if high-frequency traders can find another market that hasn’t yet been conquered by their lightning-fast trading techniques.

And we can think of just such a space: the futures markets. In reality, the HFT machines are already plunging ahead in the world of futures trading, and, unsurprisingly, the accusations have already begun flying. Now HFT has been accused of ramping up the volatility in the natural gas market by “banging the beehive” to generate more volatility – and potentially more lucrative trading opportunities – ahead of big market-moving news releases. The Wall Street Journal explains exactly what that means:

Each week before the EIA report, many traditional investors place electronic orders to buy or sell futures above or below the prevailing price, called resting orders. A trader anticipating a large inventory increase might expect pressure on prices, and offer to sell natural gas at below the current price ahead of the report. If the trader is correct, the market typically would fall and the trader’s “sell” order would be filled near the start of the decline, ideally at a profit.

Analysts and traders say high-speed firms “bang the beehive” in a bid to exploit these resting orders. Just before the data land, some traders flood the market with offers to fill the resting orders just above or below the current futures price. They hope to trigger enough orders to move the market in a given direction before the data hit.

If such tactics are successful, no matter what the data show, the flurry of trades will create wide swings that present opportunities for the rapid buying and selling that is high-frequency firms’ stock in trade.

So what will high frequency traders mean for the futures markets? As always, the HFT firms are quick to serve up the praise of their own industry – arguing that they will reduce spreads and increase liquidity. While some traders will undoubtedly welcome these changes, others will likely voice concerns about technology undermining  the integrity of risk management on the final frontier. And what about managed futures? Well, it’s hard to say at this point, but some of the managers we speak with have indicated that even the slow creep of HFT in the markets is impacting how their models behave. We’ll have to wait and see whether models will be adjusted to face a new climate, or whether the machines will rise anew.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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