The head of the main soft commodity exchange said on Wednesday he loved high-frequency traders, lauding their liquidity despite complaints from other traders that they're wrecking the market.
The sugar, coffee, cocoa and cotton markets trading on ICE Futures US have emerged as an unlikely battleground in the war of words between market traditionalists and those who employ computer algorithms to make money.
Many veteran traders complain that computer-driven trading has caused dramatic and abrupt price swings in the softs, relatively small and illiquid markets. They also complain it causes prices to become disconnected from market fundamentals such as supply and demand.
But Tom Farley said high-frequency traders make up only 10 percent of the soft commodities, the first estimate the exchange has ever provided and far less than the over 30 percent share in the New York Mercantile Exchange's crude oil contract.
They get blamed for everything under the sun, he told a Futures Industry Association conference.
When that volatility goes up, independent of the facts, people like to blame high-frequency traders, where on the contrary, we love them. We think that they dampen volatility.
The chairman of the World Sugar Committee recently complained to ICE that high-frequency traders are parasitic. An abrupt 11 percent dive in the cocoa market weeks ago, linked to trading programmes attached to a tiny exchange-traded note, drew similar vitriol.
I spend a good deal of my day fending off complaints that I get, say, 'Your fill-in-the-blank ... market has run amok, it's all high-frequency traders,' Farley said.
He said one recent incident occurred just a few weeks ago in the sugar market.
In reality, it was one guy on the floor who decided to put $30 mln of sugar in as a market order, Farley said.
FRIENDS OR PARASITES?
Algo traders may account for a small portion of the overall softs market, but can still exacerbate problems in the small markets, said Sterling Smith, an analyst at Country Hedging Inc. in Minnesota.
The problem with the algo trading is that it shows up at an inopportune moment. If a market is suddenly weak and something trips an algo-related trade and they really force the selling or buying into the market that will cause an abnormal move, Smith said.
Regulators are considering new rules for algo traders in the wake of the May 6, 2010 flash crash in stock markets.
A commissioner at the Commodity Futures Trading Commission told the Futures Industry Association conference he thinks the role of high-frequency trading in markets merits more study.
Is that liquidity important for the markets, or are they just in their own little hyper-trading world? said Bart Chilton, an outspoken advocate for more controls on algos.
(Additional reporting by Carole Vaporean in New York; Editing by Alden Bentley and David Gregorio)