The FT reported on Wednesday that an industry body representing big sugar traders has launched an attack on their high-frequency and algorithmic-based counterparts — along with the New York-based futures exchange that hosts both groups.
The attack came in the form of a letter from the World Sugar Committee to the ICE Futures US exchange. We’ve reprinted it below courtesy of the FT’s Javier Blas.
Dear Tom,
Many members of the World Sugar Committee are concerned that the Exchange is not listening to the real sugar community, on certain matters concerning the No.11 contract. They believe that the interests of the new, high-frequency and other computer based traders have gained precedence over the interests of the traditional market users.
The Exchange’s proposed changes to the “price spike,” policy were a case in point. The Committee believed it was waiting for proposals to the existing “price spike policy”, from the Exchange, which would have replicated time-tested ways of dealing with fast markets, updated for an electronic-market context. (Only because these proposals were promised were the existing “price spike policies” not challenged).
Instead, the Exchange by-passed the consultative process with the Committee, and announced changes which would have contradicted the advice of the Committee and altered time-tested futures orders protocols. These proposals would have exposed traditional market users to even greater risks than the existing “price spike policies” do but would have been easy for computer-based traders to accommodate.
The resent rise in sugar price volatility is causing difficulties for members of the real sugar community, on many levels. Whilst not all members of the Committee assign responsibility for the elevated price volatility on the computer-based traders, many observe that the increase in price volatility coincided with the Exchange ushering in the computer-based traders by turning the implied matching engine off.
It is also true to say that the extension of market open hours and days has exposed traditional market users to the elevated price volatility, longer than would otherwise have been the case, causing new stresses and risks. Whether by intention, or by design, these initiatives have cumulatively made life easier for the computer-based traders and more difficult for the members of the real sugar community.
In the current challenging business environment, the members of the real sugar community also look to the Exchange for leadership in establishing an even playing-field for all users of the contract. Many members feel that the computer-based strategies are not held to the same standards of market conduct, where the practices of order-stacking, front-running and false bids and offers are concerned. It also appears inequitable that the Exchange should assign some computer traders a lower cost of conducting business on the Exchange than the traditional market users.
Many members of the Committee are unconvinced by the idea that the computer-based traders present a net benefit to the contract because they create liquidity. Taken as a whole, they believe that the computer-based traders do not serve a useful purpose to the contract. Arguably, computer-based traders do not even contribute the traditional function of the speculator in allowing producers and consumers to transfer price risk, since they do not take price-risk home. Instead, it would appear that the computer-based traders are parasitic, contributing little to the contract (although they do contribute to the Exchange). Their presence only serves to enrich themselves at the expense of the traditional market users.
I have written to you in copy to the Committee, on this occasion, because I would like to communicate the seriousness with which many members of the Committee view these questions. Since the last World Sugar Committee meeting, especially, I have been bombarded with requests from the real sugar community to alter the Exchange’s current course.
Taken as a whole, many members would like to see initiatives which would improve the user-friendliness of the No. 111 contract for the real sugar community. These changes would include turning the implied matching engine back on, shortening market hours, observing a greater number of market holidays and taking steps to ensure an even-playing field for all market-users. Members also believe it is essential that the Exchange preserve the consultative role of the Committee, or risk undermining the Committee. At the outset, this will entail defining a revised “price-spike policy”, to replace the existing one.
As you know, the Exchange’s popularity with members of the real sugar community is at a low ebb. Since the removal of the Committee’s veto power, the Committee’s ability to influence the Exchange directly has diminished. Nonetheless, I believe that the Exchange will ignore the views of the real sugar community at the peril of the No. 11 contract. Members want to see real change in the Exchange’s direction and will be assessing the credibility of the Exchange’s response to these questions, carefully.
I believe it is to your credit that you recognized some of these concerns by reversing implementation of the latest “price spike proposals”. I know that I speak for many members of the Committee in the hope that meeting the interests and needs of the real sugar community will be at the forefront of the Exchange’s objectives, going forward.
I would like to schedule a World Sugar Committee meeting to explore these themes in greater detail. I am at your disposal in case of any questions.
Your sincerely,
Sean Diffley
WSC Chairman
And the just-released response from the ICE:
Please be advised that a meeting of the World Sugar Committee has been scheduled for Thursday, February 10, 2011. The agenda for the meeting includes discussion of the ICE Implied Matching Engine for the Sugar No. 11 Futures Contract and the formation of a working group on price spikes.
The Exchange has turned off the Implied Matching Engine for electronic trading of Sugar No. 11 Futures Contracts since March 27, 2009. At that time the Exchange announced that it would turn it off in order to assess whether doing so would increase volumes, improve liquidity and attract new traders.
Based upon a review of extensive comments received from market participants since the change was made, the Exchange has decided to recommend that the Implied Matching Engine be turned on for trade date March 1, 2011.
Looks like a win for the ‘real sugar community’ then.
Related link:
Sugar body denounces ‘parasitic’ traders - FT