The CFTC's Market Intelligence Branch in the Division of Market Oversight ("DMO") analyzed the impact of automated orders in the commodity futures market. The DMO staff studied international transactional data for 30 futures contracts over a period of approximately five years, comparing the effects of manual versus automated order placement on the futures market.

The DMO staff found that:

  • the percentage of automatically placed orders has gone up for all commodity futures markets;
  • compared to manual orders, automated orders are typically smaller in size and their "resting times" are shorter;
  • automated orders are almost exclusively "limit orders"; and
  • while the level of automation has been increasing since 2013, "historical volatility of end-of-day prices" has not.

Commentary / Bob Zwirb

Over the years, indeed over the decades, empirical analysis by economists at the CFTC has consistently punctured holes in the argument that speculation and automated trading harm financial markets.

For example, following the stock market crash in 1987, the CFTC issued a report finding that stock index futures, and program trading, in particular, did not cause the crash. Those findings, however, did not still calls for greater regulation of equity futures in the years that followed.

Two decades later, the CFTC's economists issued a report that refuted the thesis that speculative trading by institutional investors harmed the energy futures markets. Rather, they found the opposite, i.e., that oil prices rose inversely to the speculative activity of swap dealers and index funds in energy derivatives, suggesting that the positions of hedge funds "provided a buffer against volatility-inducing shocks." Interagency Task Force on Commodity Markets, Interim Reporton Crude Oil, at 5 (July 2008); CFTC "Staff Reporton Commodity Swap Dealers & Index Traders with Commission Recommendations," Sep. 2008, at pp. 4, 22-23. But those findings did not stop calls for position limits on energy derivatives, and they will not prevent such limits from being imposed later this year.

Now, a decade later, as automated trading becomes the issue du jour, the CFTC not only finds no correlation between the rise of automation and price volatility, but provides an innocent explanation for what limited relationship there is: that "fundamentals-driven historical volatility is not disconnected from trading activity" (emphasis added). Don't expect that finding, however, to prevent Regulation AT from being adopted later this year.

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