There's a New Sheriff in Town
The CFTC's BeginningThe Commodity Futures Trading Authority (CFTC) was created in 1974 by an act of Congress as an independent agency charged with overseeing and regulating futures exchanges and futures trading. It replaced the Commodity Exchange Authority (CEA), an office within USDA, which had been established in 1933 primarily to reign in the kind of unregulated speculation and market manipulation in grain futures markets prevalent at the Chicago Board of Trade (CBOT).
Ethanol Industry Seeking E30 under New Fuel Standards
The EPA and Test FuelsThe Energy Future Coalition and others argue that the EPA's so-called Tier 3 emissions standard for cars and gasoline, which is designed to cut sulfur levels by more than 60 percent starting in 2017, contains a provision that prevents gasoline producers from creating new fuel blends containing more ethanol.
Politics, Supply and Demand
Politics and AgricultureFood is essential to human well-being. Since it is so crucial, food is also inevitably political. Because essential food is derived from multiple kinds of agricultural production, politics and agriculture are unavoidably and inseparably intertwined.
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Aquaculture Remains a Top Food Production Opportunity
Rising DemandThe global aquaculture sector clearly offers a great opportunity for expansion in the future. Aquaculture production has grown at an annual rate of 8.3 percent and reached 60 MMT in CY 2010. Output must continue to increase in order to meet the rising global demand for seafood.
The Focus on High Frequency Trading
Technology and TradeThe topic of high frequency trading (HFT) of equities and commodities has become all the rage. The CFTC, the SEC, the FBI and New York's attorney general are all investigating it. However, the subject has really taken off as a result of financial writer Michael Lewis's latest book entitled "Flash Boys: A Wall Street Revolt," which is about a group of computer nerds who use HFT programs to gain an unfair advantage over less technologically-adept investors. The financial press is also filled with discussion about the matter.
It is a concept, though, that has been around since at least 2005 when computer trading programs that use electronic trading platforms to match buy and sell orders were developed and really took off. Cheaper and faster electronic trading at exchanges began to account for a significant and rapidly growing percentage of an exchange's total trading volume at the expense of traditional trading by open outcry.
Back when we were much younger, commodity futures markets were much simpler in many respects than they are today. In those days, what might be called HFT occurred at lunch time when brokerage clients left their workplaces and headed to their broker's office to eat a sandwich, watch the quote board and place a few orders as it was usually faster than doing so by phone. Veteran CBOT pit traders often counted on a brief lunch time rally resulting from orders from brokerage clients as they ate and stared at the board.
How things have changed! Trading in which an exchange computer system automatically matches buy and sell orders encouraged the development of computer trading systems that automatically create the buy and sell orders. Electronic trading now typically accounts for 90 percent or more of the CME's total trading volume.
HFT is executed by computers placing large buy and sell market orders through electronic trading platforms operated by exchanges using algorithms and advanced technical systems that anticipate and cash in on tiny price movements. The margins per unit of trade, if any, earned by these black box algorithmic trading programs are usually extremely small, but become large sums of money when multiplied by the large volumes typically involved. Contrary to technical trading systems that track price momentum, HFT programs trade in the very short term. They seldom carry a position at the end of the trading day. By now, every successful equity and commodity exchange provides electronic trading that is available most of the 24 hours of every trading day. An example of an exchange-operated electronic trading platform is CME's Globex. A few have also retained open outcry trading alongside for a part of each day, despite the small portion of their respective volumes accounted for by open outcry trading. How long exchanges will carry open outcry trade is a question.
The main questions being raised are these: Does HFT give its operators an unfair advantage over ordinary investors? Does HFT distort markets? If so, is this done in ways that breach regulations and/or commit crimes? Needless to say, these questions generate a wide difference of opinions.
(This article was originally published in the 3 April 2014 issue of Ag Perspectives as part of a WPI analysis by Bob Kohlmeyer. Click here to find out more about subscribing to Ag Perspectives.)