In early march, the British financial daily The Financial Times related the following story. Avery Putter, a commodity trader with Spectron, was getting ready to buy cocoa options on the New York Mercantile Exchange. Just as he was finalizing his buy on futures market, cocoa prices suddenly dropped and fell by 12.5 percent in less than a minute. “These days, that happens often,” said the trader.
Indeed, this is not a first occurrence. Agricultural commodities have recently been subjected to extreme volatility. For some observers, one of the grounds for the financial “roller coaster” situations might be the “high frequency trading” of traders, who very rapidly buy and sell options thanks to electronic algorithmic technology.
This is almost unanimously frowned upon in the trading community, as markets have become way too unstable. “These blunt, sharp and frenzied moves, which only last a few seconds or even minutes, are a new phenomenon, which, in my opinion, is partly due to high frequency trading,” explained Jim Cassidy, a trader with Newedge, in an interview given to The Financial Times.
The issue has already been at the heart of the debate on the regulation of financialized markets. Indeed, in November 2010, Jean-Pierre Jouyet, Chairman of France’s Autorité des Marchés Financiers, was already pointing out that the technology at the root of high frequency trading was making it more difficult to track price rigging, “while disturbing investors who are no longer able to figure out the market.” At the same time, France’s Minister of Economic Affairs Christine Lagarde also called for the ban, in certain cases, of this practice, which is very common in the United States and growing in Europe, where it represents close to 30 percent of all trades.
Today, nothing clearly tells that “high frequency trading” is responsible for the volatility of agricultural commodity prices. Other factors are to be taken in consideration, such as the tensions between supply and demand or the levels of food reserves. But it is quite obvious that this practice certainly contributes to the opacity prevailing in financial markets, and stirs up the natural volatility of agricultural commodities. This is an issue that is of the utmost importance in the context of the preparatory talks for the Financial and Agricultural G20 summits…