HFT Has Disconnected Commodities From Fundamentals

Tyler Durden's picture

High-frequency traders have caused U.S. commodity futures prices to disconnect from market fundamentals of supply and demand since the 2008 financial crisis. An extensive and detailed analysis by the United Nations Conference on Trade and Development just confirms what we have shown again and again (most recently here in Silver) that HFT's impact on the world is not all unicorn-tears and liquidity-providing. Markets are more exposed to 'sudden and sharp' corrections, and as Reuters notes "The strategy of those involved in high-frequency trading tends to reinforce the correlation between equities and commodities". In a somewhat stunning conclusion from an academic treatise, the authors find "We are not saying that it's all about speculators and (that) fundamentals don't matter. But we are saying that they tend to matter less, except in extreme cases,". Unlike other studies on the linkages, the UNCTAD study uses tick-data and finds correlations rising and trade size dropping as frequency increased dramatically since the crisis in 2008. Critically, one final consequence is that investors seeking to diversify or hedge against other investments in their portfolio are often disappointed as the increased HFT creates a destabilizing effect on commodities (increasing volatility) and can often create bubbles.

The number of Ticks (trades) has risen exponentially faster than the volume - as the black (ratio) line indicates - for WTI in this case.

And on a rolling 5-minute correlation basis - it is abundantly clear that there has been a regime shift in the relationship between US equities and WTI (in this example)...



MPRA Paper 37486

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Dre4dwolf's picture

High frequency trading should be banned , its like boting in an MMORPG.


Pinto Currency's picture


Its high frequency money printing not high frequency trading that caused the disconnect.

LowProfile's picture

I'm still on the floor that the UN actually did something I applaud.

Pinto Currency's picture


HFT may have been used to contain commodity prices to allow the biggest financial bubble in history to be blown.

There is no question HFT can be used to distort markets - the question is how it has been increasingly used over the last 15 years.

It would be very convenient now to blame the coming hyperinflation of consumer goods prices on HFT and not the central banks who are the real culprits.

LowProfile's picture


There is no question HFT can be used to distort markets - the question is how it has been increasingly used over the last 15 years.

I'd hazard it didn't really get going until 2009.

It would be very convenient now to blame the coming hyperinflation of consumer goods prices on HFT and not the central banks who are the real culprits.

That will prove exceedingly difficult since all they do is...  Trade.

Clearly the creation of money via borrowing against inflated prices, and therefore the CREATION OF MONEY BY BORROWING IT INTO EXISTENCE will not escape attention.

Besides that, the world is waking up, check the attitude towards gold in the ME, India, China, etc.

Best case scenario is that the whole thing blows up spectacularly, the COMEX & LBMA implode and shut down, and the Asians create a 1:1 allocated metals market (PAGE 2.0 - Shh...).


Pinto Currency's picture


In the meantime we need to get our energy infrastructure ready for a tremendous shock - assume 50% drop in oil imports. Now GO!

The Alaska Highway was built in 1 year.  This can be done.

Buckaroo Banzai's picture

Although I dont necessarily disagree with their conclusions, the fact that the UN sponsored this study makes me wonder what their hidden agenda is. "The United Nations. You will never find a more wretched hive of scum and villainy. We must be cautious."

LowProfile's picture

Agreed.  But I do hold the possibility that there are disparate factions within the UN, perhaps a few rebels, and maybe even some good guys.

No bureaucracy is a monolith, not even North Korea.

PrDtR's picture

Dont get up yet.. the devil's in the details.. you may actually be in a coma!

NidStyles's picture

In fractional reserve systems, such as our own, there is no real difference.

mc_LDN's picture

Totally. I just realised if things went mental and WW3 kicked off these HFTs could quite probably crash markets such as Gold. Then what? I mean seriously - this is alarming.

mkhs's picture

Simple, buy the dip.  Imagine a fire sale on gold.

Zola's picture

That could also be linked to the fact that all markets have become a Beta trade courtesy of the FED no? 

SheepDog-One's picture

I want to buy and sell something 100X per second, sounds so COOL! 

toothpicker's picture

Or maybe just sell something I don't own 1000000000000000000000000000000000000000000000000000000000 times (x10)

Richard Chesler's picture

"Bubbles" is Ben's middle name.


The Axe's picture

NO shit sherlock....

JustObserving's picture

When there is fraud, everything disconnects from its fundamentals.

citta vritti's picture

except, of course, when fraud is the fundamentals

espirit's picture

No more Rainbow Skittles and Koolaid?

Say it ain't so...

resurger's picture

Let the Primary dealers deal now! Congrats cocksuckers

Bunga Bunga's picture

Get over it, some have to be the suckers.

SIOP's picture

Fundamentals when out the window in 2009.

jjsilver's picture

HFT is just cover. It's the Federal Reserve

Christoph830's picture

Totally agree.  I think the old adage "Don't hate the player, hate the game" is very apropos here.  The heightened correlation is ultimately the result of Fed actions.  HFT is just taking advantage of this at a faster rate.  This correlation would still have increased without HFT.

jcaz's picture

LOL-  unhedging the hedge funds......   In the end, everyone will own Apple and no one will be able to sell risk because there is no risk to sell-  Orwell would be so proud......

junkyardjack's picture

Is this one of those koans like what is the sound of one hand clapping?  What do you mean disconnected from fundamentals? How can the market disconnect from something that doesn't exist?

agent default's picture

When fundamentals don't matter anymore in the commodities markets, expect severe shortages of everything and soon.  HFT and blatant price manipulation to the downside will turn the commodities markets in one big "Extreme case" down the line.

casey13's picture

The public has responded to this in one of two ways. They got out of the market or they became traders themselves. The long term investor is mostly gone. This exacerbates  the problem as nobody looks at fundamentals anymore. A chart is all that is needed and so when everyone is using the same text book the moves get exaggerated. Thus there is no longer a market just a continuous intervention to cause the herd to move in the desired direction.  

nevadan's picture

the UNCTAD study uses tick-data and finds correlations rising and trade size dropping as frequency increased dramatically since the crisis in 2008.

Correlations have no doubt risen, but I'm not sure they can claim trade size has dropped when a gazillion one lot trades hit the tape in a split second.  Methinks trade size is hidden in the flood.  It is hard to imagine enough pea-shooters hitting the bid in the PM's at exactly the same instant to cause the  meltdowns. 

TradingJoe's picture

Wow, hedgies clobbering TVIX!! Selling short like there is something for free right there! A real frenzie!

Shleprock's picture

Where is the 3 O clock melt up???

cjbosk's picture

TVIX is busted, everyone's running for the door!

TradingJoe's picture

And then, oh miracle, CSFB issuing more shares...after arbitration gains are booked of course! :)) suckers :))

worbsid's picture

Fundamentals = my idea of what should happen.

Disconnect from fundamentals = not my idea.

Fundamentals work until they don’t.

TideFighter's picture

Muppets have a new character ....the honey badger...and the honey badger don't give a shit. 

adr's picture

Just bend over and take it. You can't fight anymore.

We are all talking about what needs to be done, but nobody can actually do it because .gov is always watching and you'll be disappeared before you can get a group large enough to have any effect.

The Glenn Beck rally on the mall scared TPTB shitless. That group of people could have changed the entire course of the world if Beck would have just stood there and said, "Hey, you know what. Let's take this country back. Everyone on the right side go take the White house, on the left side go take the Capital building."

That was the last chance. There will never be another one again without massive bloodshed.

We have our foreign born muslim clown muppet president doing the bidding of the radicals that plucked him from Indonesia and told him, "If you do what we say and what we want, we'll make you president of the United States."

Stanwick's picture

Gold certainly looks disconnected vrom the bulls. Even priced in apple it's looking toped.

Nobody For President's picture

I now know so much less than a year ago when I started reading ZH. Another year, and I vill know notting...

So, questions:

1. Who is it, what funds/banks/brokers/ who the fuck - actually owns and runs the computers that are doing the bulk of the HFT bullshit? i.e., the Fed may run the game, but who are the players? Somebody here on ZH (probably more than one) actually know at least some. And I CAN hate both the game and the players who have corrupted price discovery, fundamental analysis, and all the rest of what was once a more or less honest and 'real' market.

OR - where could I look online for this info?

2. Who or what (and why) is screwing with palladium futures? Twice this month they have taken a ~5% hit, including today. WTF is going on here? (I suspect it is not supply and demand, but I have become a cynic in my old age...) Is this just reflecting the China slowdown, or is somebody(s) messing with the PM that don't get no respect?

I'm irritated by all this HFT shit ...

Quinvarius's picture

If you can store it in your closet, so can everyone else.  HFT will always lose to real life supply and demand.  That is why nothing they do can stop the ascent of PMs.  All they can do is disconnect the paper system from reality, cause scarcity,  and thereby self destruct the system.  HFT manipulation is a product of worthless money.  Organizations willing to take unlimited losses because they have access to printed money only to achieve a pricing illusion for political reasons can not exist if the money actually has value.  Therefore, our paper money has no long term value as money, and the real market for hard money will continue to unmask it.

Take silver for example.  If the smackdown last year was based on market forces, why did the supply dry up?  http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX%20WARE...

Fakery caused scacity.

Rynak's picture

You don't seem to get the concept of fiat. As long as they can print whatever they want, they can print whatever they want... including ETFs. Manipulating metal prices up and downwards (and especialyl doing both), will work exactly as long, as those ETFs are taken seriously (i.e. TRUSTED). As long as that is the case, PMs will move whereever CBs want them to go.... and the populace let's them go. Heck, even in complete contradiction with reality, it will work as long as people believe it.... because THAT is the currency governing every other currency: trust. Even if a populace were going right into economic hell, it could in theory stick to the fake-market.... even if it dooms them.

"Fundamentals" merely is what really is going to happen, once it becomes unavoidable. That says nothing about how people will imagine it.

TRUST. That's what it's all about. Every social and conceptual convention will rise and fall, by trust, and nothing else than trust (though, other aspects may push oneself towards mistrust).

Why so? Simple: You can in theory always lie, even in the face of your own death. Sure, lying won't avoid death, but that doesn't mean that the one dying will believe that he is dying.

Yep, i think this is the blackest post i've written so far on ZH.

cjbosk's picture

It's a big boys game now.  Honestly, if you can't take the heat get the hell out of the kitchen. 

The markets have never made any sense, not now, and not ever.  Climging a wall of worry" is the saying for a reason, someone didn't just make that up and manipulation has been a practice as long as there have been forms of trade.

It is what it is, no more, no less.


Nobody For President's picture

Kid, You are wrong: I have been following the market since high school - 1955; and put my first money in the game in 1962, after grad school and the Army. Once upon a time, the markets made sense, and fundamentals worked.

And - I am now a well funded retiree because of it.


In short, if you are so damn smart, howcum you ain't rich? (Maybe  you are - you are anonomous).

I don't wanna bust your balls, but you are wrong here:

the markets USED TO make sense. 

Fundamental analysis (fuck yer charts) made sense and made a lot of people, if not rich, well to do.

That's me - I am now playing with $  I can lose, trying to at least stay even with the HFTs, by figuring out what headlines they are reading. 

Different era, different game.

Still fun to play.

Who the fuck is whining here?

Fuck you kid - you are still clueless with the 'kitchen' quote. Your reply is so sad - you  have NO sense of history, and you have NO sense of the presence.

I'm not 'climging' to a damn thing - I am present, and I am still making a lot of fucking money. ($2,500 today). 

One must adapt to changing circumstances = evolution!


Rynak's picture

You may be right about history, but he is right about the current.

Tell me how humans adabt to nanosecond markets.... heck, you can't even react in a timespan of 100 MILLISECONDS. And please don't tell me tactics or strategy... because that is just playing the game, in a rigged casino... of players that for PHYSICAL reasons (computers right at the exchange) always can outmaneuvre you... and that is not even taking into account, the casino possibly knowing your exact portofolio and bets AHEAD OF TIME.

How outsiders could win? Three possiblities:

- You stay below the radar, and are comfortable with being a small fish outsmarting obvious artificial midterm algos (i.e., the constant pumping and dumping of PMs, at almost exactly the same threshold levels).

- Your almost winning, but then they send the gov and police after you.... i.e. via confiscation... and you have like 10.000 buddies like you, who will resist. Yeah right.

- The elite in other ways pisses off the populace enough to revolt and NOT step down.

As you can see, besides of the "under-the-radar" approach, none of the above involves winning the market, by merely playing in it. Part of the reason for the low volume :)

worbsid's picture

Don't be lazy. If you really want to know HFT what, how and who then 'Google' or use some other search engine and then read all about it.

I used to write algos in basic on an Apple of the futures market. We just didn't have access to the circuits to front run trades in nano seconds. Just think, I could have been one of the 1% crowd if the world wasn't so cruel.

Nobody For President's picture

Don't be lazy?

You dumb fuck - I spend 8-10 hours day with one eye on trading screen and the other eye on economic 'news'.

Give me some REAL information that I have not found or STFU!

Inane comment - if you are so smart, why ain't you rich?

I am.

Fuck you.

I'm somewehere in the 5% - meaning I have 'enough'

Wonderful word, 'enough'.

If you truly want to be part of the 1%, one - good luck with that; two WTF is the matter with you?

Seriously - how much is enouogh?

oldman's picture

Hey, Nobody

I asked each of my clients in 1993 the same question:

How much is enough?

Their collective answer was:

"Enough? There is no such word, om."

Pissed off, huh? I have those days            om