So much for a good nights sleep. The CME Group has decided to match its competition and go with a longer trading day. Soybeans, corn, rice and wheat futures are now trading electronically from 5 p.m. to 2 p.m. the next afternoon. The change means ag markets will trade virtually around the clock, leaving market participants only a three-hour breather between sessions. The settlements will still be based on the pit closing prices at 1:15 p.m. As with most changes, there will be losers and winners. Farmers will likely fall somewhere between the two.
The clear winners will be the “high frequency” traders, especially on report days. High frequency traders are all about speed. Using super-fast supercomputers, they make trades in a matter of microseconds, that’s 1 millionth of a second. They look for short term market opportunities and inefficiencies that come and go very quickly. Their objective is to collect tiny gains hundreds and thousands of times each day. High frequency traders currently account for over 50 percent of the stock trading volume in the United States. The percentage is smaller in the commodity markets, but is growing.
In the ag markets, the high frequency traders’ speed advantage will show up most noticeably when the USDA puts out important crop reports. Prior to the change, market participants had a couple of hours after a report to digest the numbers and formulate strategy before the markets opened back up. Now, unless an exception is made, our markets will be trading when the numbers are reported. That means the quickest orders will have the advantage. What you will likely see on report days will be more volatility in the form of exaggerated price moves.
I currently work as an agricultural marketing consultant, helping producers market their crops, but in my former life I was managing director and head of trading for a hedge fund. I dealt with high-frequency traders on a daily basis. On one hand they can be a real annoyance when it comes to pushing markets around, but on the other hand, they do provide added liquidity. They also bring in substantial revenue to the exchanges which means they are probably not going anywhere.
To give you an idea of how important speed is, consider this. A New Jersey company is currently laying a $300 million fiber optic cable stretching 3,000 miles under the North Atlantic connecting financial centers in New York and London. They plan on leasing the cable to a handful of high frequency trading firms. What will they get for their money? Data will make the round trip between New York and London five milliseconds faster than before. As a senior vice president of the company laying the cable put it, “Those extra five milliseconds could be worth millions every time they hit the button.”
If you are a producer with a long term marketing strategy, the added volatility brought by the high frequency trading and extending trading hours is not necessarily a bad thing. Some days volatility will work to your advantage sending prices to levels you likely would not see otherwise. These opportunities may come and go very quickly so you must be prepared. That speaks to a well defined marketing plan and having resting orders called in to your buyers.
The risk of added volatility will fall most heavily on traders with a short-term perspective. They will find themselves at a distinct disadvantage trying to deal with rapid short-term moves having little to do with market fundamentals. That will certainly include producers who try to outguess the markets, and those who make spontaneous marketing decisions based on whims and feeling.
A strategy changing impact high frequency traders have already had on our markets concerns “stop” orders. These are basically “get me out” orders that futures traders place in the market in an attempt to limit their risks should the market move against their position. They are often placed above or below important chart price points and become a “market order” when a specified price level is hit. Short-term volatility fueled by the high frequency trading can make it difficult, if not impossible, to get out of a losing position in an efficient manner. There are even high frequency trading strategies designed to anticipate where stops will likely be placed. The result – stops no longer provide the market protection you might expect, and short term moves are not to be trusted.
The bottom line for the producer is that extended trading hours, high frequency traders and market volatility are likely here to stay. The key to marketing success is to work a well-conceived long-term plan. Don’t try to battle in the short-term, you are overmatched.