Computerization of the futures market for order entry and execution eliminated any semblance of flow in these markets, in my opinion… Computers are responsible for the ridiculous level of volatility, due mostly in part the the fact that we went from transparent markets, where all could see and hear the bid/offer and size…That worked well for over 150 years…We have replaced transparency with INVISIBILITY..
That is why we have such severe large moves, marked by a flurry of rapid jumps… followed by almost no trade at all…we have a situation where its computer algorithm vs computer algorithm…This fact has effectively destroyed the inter market spread market as well, destroying what had been a deep liquid market which had 1/3 of the flat price’s volatility, to just another trading mechanism at the mercy of the games large spec firms can play with their order entry.
For example there are spread programs which show 1,000 lot bid offer on the screen, but the entire order gets pulled if one contract trades there… In effect they are bogus orders…Another order type, the ice-berg, is also deceptive, and in the days of open outcry, would have been totally against the rules… An iceberg order is one where a large 500 or 1000 lot order is hidden as a series of small orders, say 2 to 5lots.
Again, this does nothing except create unnecessary volatility and price fluctuations and disrupts the market’s 3 primary reason for existence, 1) price discovery, 2) transparency, and 3)risk transfer via market continuity and depth… All three of these issues are uniquely impaired in a market such as the grains or meats, where there is not an underlying cash market running simultaneously with the futures market…With the bonds and Stock indexes, there is a real time price discovery in the cash market which can be used as a hedge.
With the grains and Meats and other less liquid markets, such a uniform real time cash market does not exist..
The futures market used to provide that function, prior to the computerization of the order flow. Because of that function being non existent, real spreads have widened considerably, large orders which would have been dispersed and processed in the pits are now responsible for ridiculous volatility.
I recall watching a filling broker fill a 3000 lot or an occasional 5000 lot in the soybean pit, and having that order be filled entirely within 1 or 2 cents.. A similar order today, if one just put it on the screen in one chunk, would probably move the market 30 cents… So, who suffers? We all do as consumers because the price slippage that goes along with that price discrepancy gets passed on to us…
A one cent move on 20 bean contracts is 1000 dollars…a 30 cent move is therefor 30,000…multiply that by a factor of 5, and a hedger, most likely a farmer or grain elevator or if its on the demand side, general foods or Pillsbury … they are looking at 300,000 of added risk on a 200 lot and 1.5 million dollars on a large 1000lot order. That price slippage gets passed on to the economy in the form of higher prices. And a large producer may do 15 to 20 large orders like that every month as a function of their hedge needs, you are now looking at up to 30 Million a month in added risk, or 120Million a year in added risk to a large hedger.
Mind you, that its also being suffered on the other side, as farmers are losing market value on their hedges of their cash sales.
If we ever get to the point where the price of food becomes a front page story, like the price of oil is, you will definitely hear a large outcry for such slippage to be addressed.
But that’s just my opinion.