Tag Archives: sugar algorithmic trading

No more 10% falls in less than a minute for No.11 sugar futures

In early February raw sugar futures prices on ICE fell by just under 10% in less than a minute.  Such trades will not be possible from 1 March 2011 when ICE is to reintroduce its implied matching engine.

The change will become effective when ICE’s implied matching engine resumes.  It is not yet clear what ‘acceptable trading ranges’ and ‘acceptable volatility’ means.

The implied matching engine uses an available bid to generate a spread quote which mathematically irons out the possibility of extreme price deviations. Thereby ensuring, in most cases, a correlation between different contracts and preserving the spread differential.

Not the best news for algorithmic traders.  Another proposal is the introduction of circuit breakers to prevent extreme price spikes.  ICE is consulting on the idea.

Advertisements

Circuit breakers spoil the party for commodity funds and algorithmic traders

ICE may accept advice of the World Sugar Committee and introduce circuit breakers when sugar futures, experience price spikes or high volatility.  Trading would be interrupted or halted when limits are breached.  This may decrease the volume of sugar futures trading if funds, computer and algorithmic traders and those trading volatility reduce exposure to the market.  However, the move is intended to reduce commodity price volatility and agflation.

Rule 3.36. World Sugar Committee

(a) The World Sugar Committee shall be an Exchange Committee and shall consist of at least seven (7) and not more than twenty-one (21) individuals who are actively engaged, or employed by a firm that is actively engaged, in trading world sugar. The Board shall endeavour to appoint representatives from diverse interests within the world sugar community, such as industry representatives, FCMs, asset managers and traders.

(b) The Committee shall have and may exercise only the power or authority of recommending to the Board any modifications to the contractual terms and conditions and advising the Board with respect to World Sugar Futures and Options Contracts.

An era of high sugar price volatility?

High volatility has been a feature of futures and physical sugar markets over the past months.  Whether high volatility is likely to become a long-term feature of the sugar market or whether traded options on sugar futures will become liquid and a viable means of trading such volatility or whether governments, regulators and exchanges are likely to put in place measures to stem price swings is yet to be seen.  However, there are a number of factors that if not addressed give rise to the possibility of higher price volatility over the long-term.

Global warming and as a consequence climate change raise the risk of weather instability in the form of extreme weather and an increase in magnitude and frequency of such events.  In early February cyclone Yasi destroyed up to 25% of Australia’s sugar cane crop.  Supply tightness as a result of such weather events, increasing world population and rising demand for ethanol leading to sugar cane, particularly in Brazil, being diverted to ethanol production potentially provides sugar with price support.  Rising oil prices make biofuels, including ethanol from sugar cane, viable and more competitive, but higher biofuels demand potentially decreases sugar supply and removes agricultural land from food production to the growing of crops for biofuel production.  Rising food prices have led and will continue to lead to political instability around the world, in some cases pushing oil prices even higher.  Such political instability raises concerns amongst governments and often results in decisions aimed at protecting domestic food stocks, including sugar supplies, at the expense of potential exports.  India recently referred a decision to permit up to 500,000 tonnes of sugar exports, under its Open General Licence, to a government panel for review and ratification to ensure sufficient domestic supplies prior to such an approval.

Due to the serious nature of the above issues and the potential for market and political instability, futures exchanges have moved to play their part in reducing price spikes and volatility resulting from computerised algorithmic trading.  ICE announced in February that it may revert back to automated price generation.

ICE automated price generation

Regulators are also exploring measures that can be put in place to ensure price transparency including clearer supply and demand outlooks, open access to futures trade data including large positions held by funds and reporting and/or placing OTC trades through the exchanges.  As there seems to be no consensus on the link between derivatives speculation and physical commodity prices, limits on futures positions seems unlikely.

Nicolas Sarkozy has identified commodity price volatility as a priority during France’s presidency of the G20 group of nations. US beet production may decrease by 20% and in a move to avoid this, last week the USDA gave Monsanto the go ahead with its genetically modified sugar beets.

Monsanto sugar beets get green light

ICE may reinstate automated price generation

ICE raw sugar futures volumes are at five month highs at over 209,000 contracts.

ICE may reinstate automated pricing for its sugar contracts in an attempt to decrease volatility and price spikes said to be caused by algorithmic trading.  Volumes are higher since ICE automated price generation was last used in 2009.  Automated price generation helps generate bids and offers more closely replicating pit trading and maintaining fair value between contracts in different months, thereby eliminating some arbitrage opportunities.

In light of rising commodity prices, increased volatility and calls for greater transparency, exchanges are considering various ways to achieve such objectives.  In January 2011 ICE delayed the start of its Cascading Stop Mitigation system aimed at overcoming some of the impacts of algorithmic trading and pre-specified orders on the ICE platform.