ICE Takes Further Steps To Protect Itself From "Parasitic" HFT Algorithms

Tyler Durden's picture

As HFT algos continue to increasingly encroach on commodity trading, the most recent example of which was the berserk Nat Gas algo documented previously, the ICE has taken yet more steps to protect itself from "parasitic" algorithmic traders (a topic that has been beaten to death on Zero Hedge since the spring of 2009). From Reuters: "ICE Futures U.S. will increase its ability to adjust trade prices in softs futures, the latest in a series of changes it has made to deal with volatility in its coffee, cocoa, cotton and sugar markets. The amended rules will be effective July 1 and follow a series of changes to reduce unwarranted volatility in 2011, following the "flash crash" in equity markets in May 2010 that was exacerbated by high-frequency trading. In January, ICE delayed its attempt to mitigate cascading stops in the softs complex following feedback from market participants." Basically, the exchange has now decided to override the "market" at its sole discretion. ICE will be able to adjust trades made in coffee "C", cotton No. 2, cocoa, frozen concentrated orange juice and sugar No. 16 futures contracts. It will do this if "the exchange determines the original price of the trade does not represent the market value of the specific futures or options contract at the time of the trade," a notice states." Expect to see comparable approaches to ignoring what HFT quotes say as mini flash crashes become a now daily occurrence.

This is not the first time the ICE has had close encounters with the HFT scourge. Back in September 2010 we presented the frustration of a sugar trader following the incursion of HFT algos on the ICE. It only took several months for the ICE to realize that we voice mostly valid concerns:

The exchange has grappled with how to reduce unwarranted volatility.

ICE bowed to the World Sugar Committee's complaints about wild price swings caused by what they called "parasitic" algorithmic traders. ICE turned on the implied matching engine, which makes a correlation between contracts and preserves the spread differential, for sugar No. 11 futures.

A week after the cocoa market saw its most volatile day on record in early March, ICE announced it was expanding the range in which trades cannot be canceled for cocoa and cotton futures.

Also this year, ICE increased the daily trading limits in the cotton market, made changes to more no-cancellation ranges and revised its reasonability limits in the softs complex.

Altogether this is good news in that exchanges are finally realizing that what happens when 19 year old math Ph.D. quants set supply and demand using broken math algorithms, is not precisely price discovery.

We expect the CME to follow with comparable overriding approaches of their own. Then, eventually, the NYSE and Nasdaq will also join the fray, although by then about 1% of all stock volume will actually transact on legacy exchanges. Not even the world's biggest roll up will do much to help them at that point.