What’s all the fuss?

From the inbox:

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from “daytrading” accounts, or said simply, speculators dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in. This also explains why moves such as the recent desperate SPR release by the IEA are generally doomed to failure. The CFTC’s Gary Gensler said that “The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads.

(original source here)

Some observations:

  1. Does anyone know if such data was collected previously, say, twenty or thirty years ago? I’m just curious how this would compare. Many people seem to think that this number is obviously much too high, but with neither context nor empirical/theoretical justification.
  2. What is the Large Trader database? Simply that, it is the data from the daily submission of Form 102 and Form 40 submissions by firms with ‘large positions,’ based on open interest. The current minimum levels are here. According to the CFTC’s “This Month in Futures” such large traders account for about 94% of OI on CL, 90% on C-, 94% on W-, and 75% on SP.
  3. The ‘Large Trader Volume’ that is quoted in the slides will be biased downwards because it only accounts for changes from at a weekly frequency, but it is comparing it to all volume.
  4. Why is spread trading so wrong? Last I checked, it was an integral part of physical hedging. But maybe things have changed in the past 12 months…
To be clear, I am not saying that HFT is all that and a slice of bread, but I’m always disappointed at the breathless reporting of statistics such as these with absolutely no context attached, much less the mis-matched nature of the numbers being compared (weekly position changes vs. daily volume without accounting for spreads.) Yet it is exactly these sorts of breathlessly reported numbers that will be cited, repeated ad nauseum, further undermining the public’s faith in the commodity markets, and (most importantly to me) mean that I’ll spend the next 10 years explaining to farmers why these numbers can’t be used to justify beliefs that the markets are all rigged or unrelated to the physical markets.

Posted on July 11, 2011, in Futures Markets. Bookmark the permalink. Leave a Comment.

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