The machines are taking over markets for energy, metals and food.
Automated trading systems now account for half the volume in many commodity futures after proliferating over the past two years, a government study has found.
The rise of trading run without human intervention has sparked controversy among the farmers, ranchers, industrial companies and hedge funds that trade futures. Some contend prices have become disconnected from forces of supply and demand because of algorithms, while others welcome added volumes. “This is a charged debate,” said Rick Lane, chief executive of Trading Technologies, a software vendor.
The US Commodity Futures Trading Commission, a derivatives watchdog, has suggested rules to lessen the risk of mayhem from a computer gone awry. Industry groups have pushed back.
Automation can range from sophisticated black-box trading systems to off-the-shelf kit that helps execute large orders. As electronic networks replaced exchange floors, trading speeds have accelerated to the point that someone clicking with a computer mouse is considered slow.
If you understand [automated trading] better you can use it as an extra tool to position yourself better. Don’t ignore it
The study, by two CFTC research analysts, found that commodities such as grains, oil and metals previously had a relatively small amount of automation compared to financial products such as interest-rate and currency futures.
But “both the level of automation and the speed of trading continue to increase” in physical commodity contracts, the analysts wrote.
The automation of grain and oilseed volumes rose from 39 to 49 per cent between the periods 2012-14 and 2014-16, the study found. Livestock futures went from 32 to 46 per cent automated, precious metals climbed from 46 to 54 per cent and crude oil increased from 54 to 63 per cent. The data came from futures exchange operator CME Group, which declined to comment.
In soyabean and wheat contracts, more than a quarter of volumes now consist of two automated systems transacting with each other, with an even larger share coming from deals that match automated and manual traders, according to the study. The CFTC also had no comment.
Automation has concerned some traditional users of agricultural futures markets, which date to the 19th century. Last year a US beef trade group complained that lightning-fast traders were undermining the usefulness of the market.
A grain trader at a US hedge fund lamented that “fundamentals”, such as corn yields or exports, no longer had as much impact on prices. “The biggest reason for that is the amount of algorithmic trading happening inside our markets is dramatically greater than it’s ever been,” he said.
Daan Vriens, chief executive of Cefetra, the biggest supplier in Europe to the animal feed market, said it had invested in two algorithmic trading funds. “If you understand it better you can use it as an extra tool to position yourself better. Don’t ignore it. Some of the people in the industry ignored it, saying fundamentals will prevail,” he said at the FT Commodities Global Summit in March.
Mr Lane said: “We’ve seen a greater acceptance and willingness to use automation across our client base.”
Additional reporting by Neil Hume