From ranchers to fund managers, ‘algos’ cause a stir

 Computers do not eat bread, wear jewellery or, for the most part, drive cars. Yet computer algorithms rather than humans are increasingly setting the prices of wheat, gold and fuel. Automated trading systems account for large volumes of transactions in commodity futures markets. In grains and oilseeds they account for 49 per cent, precious metals 54 per cent and crude oil 63 per cent, according to the US Commodity Futures Trading Commission. Such systems range from sophisticated black-box algorithms to simple programs that execute an order when prices reach a set level. At CME Group, the world’s biggest futures exchange operator, orders have to be tagged as automated or manual to ease identification. Automation has fuelled a rise in volumes and fee revenue for commodity futures exchanges. But it has also sparked a debate over whether the mechanics of determining prices has changed for the better. Specifically, there are concerns that “fundamental” information such as weather or crop conditions is less useful in guiding short-term prices. In early 2016, a trade group for US cattle ranchers confronted CME Group with concerns that fast computer traders were causing costly price gyrations in the cattle market. “We’re now in an electronic marketplace. The speed of computer advancement and technological advancement has absolutely exceeded our ability to adjust,” says Sarah Calhoun, government affairs manager of the National Cattlemen’s Beef Association. The exchange group has since made amendments to its cattle futures contracts and changed how it regulates order messages, by limiting the number of messages a trader could enter per transaction...more