An Analysis of High-Frequency Trading's Effects on Market Quality in the Grain Futures Complex
The grain industry is heavily reliant on the futures market to effectively market their products. Whether it be a producer, merchant or processor, the grain industry benefits from the price discovery and risk transfer functions of the futures market. Any disruption to the functioning of the futures market will likely have negative consequences for grain industry profits and the general economy in the form of misallocated resources. In recent years, the grain industry has alleged that the activities of high-frequency traders (HFT) have caused a disruption in the grain futures markets by causing prices to be more volatile, manipulating prices, and trading at a technological advantage. Whether or not these allegations hold merit is difficult to determine, given the relatively new emergence of HFT in securities markets, and more recently commodity and agricultural commodity markets. The empirical evidence currently surrounding HFT is inconclusive regarding whether or not HFT causes volatility and highlights other benefits of HFT that are not commonly included in grain industry complaints. These benefits include, that HFT increases market liquidity and improves the price discovery function by making prices more efficient. These benefits are important to the grain industry as they lower the cost of hedging their products and ultimately improve marketing decisions.The challenge for regulators in developing policies surrounding HFT is twofold: first, since HFT is new, acquiring complete and robust evidence is difficult; and secondly, they are challenged with balancing the interests of all futures market users, from HFTs to the grain industry. How they proceed will not only have consequences for these two interests, but ultimately the general economy will be impacted.
Fransoo, Jason M.J. (2013). An Analysis of High-Frequency Trading's Effects on Market Quality in the Grain Futures Complex ( Master's thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.