Jeff  Carter

As a person who traded his own money for years and years, since 1988 to be exact. I think I am qualified to know what a real market looks like and what a fake market looks like.

For years, the commodity markets were markets that could be very volatile, but at least they were somewhat predictable. That all went out the window in 2009 when the CME Group ($CME) actively pushed its off exchange customers to the screen. CME denies that they did this, but traders with ties outside the floors know different. CME marketing people actively pushed the market off the floor because CME makes more money when it is on the screen.

I hadn’t seen any academic studies that validated my gut feel until today. I had seen academic studies that looked at stock markets. But I hadn’t seen anything in futures, specifically commodity futures, until today.

The report examines the front-month contracts for NYMEX-traded WTI oil as well as sugar, wheat, corn, soybeans and live cattle between 1996-2011.

It concludes that there is growing evidence that “the financialization of commodity markets has an impact on the price determination process”, which is important for two reasons

I always knew that the marginal volatility at any specific point of time during the day was much lower than when the markets were not on the machine. Daily settlement prices were screwed up a lot. In hogs, the pork cut out would move lower and the futures would move higher. However, I always thought the supply and demand effects of the marketplace would outweigh the machines upon settlement. It turns out, I was wrong about that.

In 2009, when the Lean Hog($HE_F) contract made the jump to the screen, traders in the pit knew something was up. You couldn’t get out of anything and spreads moved like they never had before. Traditional seasonality went out the window. I hypothesized that it was the factory farming wringing out seasonality but it turns out I was incorrect in that assumption too. It was the HFT entering the market.

Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.