Copper Prices Zigzagged Wildly When Almost No One Was TradingBy
Volatility surged on Monday when U.S. exchanges were closed
Copper prices swung almost $100 in 30 minutes on the LME
When copper went haywire late Monday evening in London, all but a few die-hard traders in China were asleep. The European workday was ending and Americans had a public holiday.
For traders still watching their screens, the reason behind whipsawing moves in London copper was obvious: an algorithmic trading system had gone off the rails, said Guy Wolf, global head of market analytics at commodities brokerage Marex Spectron Group Ltd.
For half an hour, copper zigzagged by almost $100 on the London Metal Exchange. More than 2,200 contracts traded between 6 p.m. and 6:35 p.m., the most for that time of day since 2012.
The move came shortly after reports that BHP Billiton Ltd. was attending mediated meetings to discuss ending a strike at the Escondida mine, but that did little to explain the price swings.
Sudden jolts in markets, often called flash crashes, are becoming more frequent as markets become increasingly complex and fragmented. Trading strategies, such as automated arbitrage in contracts around the world, are relatively new in the world of metals trading, where the dominant exchange is 139 years old and still operates an open-outcry ring.
In recent years, the LME has tried to attract more high-frequency traders and modernize its systems to boost liquidity and trading on the exchange. The move has attracted some criticism from veterans such as Michael Farmer, co-founder of hedge fund Red Kite, who warned last year that algorithmic funds were creating an uneven playing field.
It’s likely that the moves were triggered by automated computer programs that specialize in arbitrage trades between London and Chicago, according to Wolf. The system probably didn’t take into account that Globex, CME Group’s electronic trade platform, closed early for Presidents Day.
Without Globex open, the trades that the system placed on the LME couldn’t be counterbalanced by offsetting orders on the Chicago exchange, Wolf said. The LME was then probably flooded with orders as the system repeatedly tried to bring the trades back into balance.
“Algorithms will blindly follow the tasks they are set within the parameters they are given,” said Wolf. “As markets become increasingly electronic, we often see high levels of intraday volatility for brief periods that ultimately result in little overall price movement.”
Miriam Heywood, a spokeswoman for the LME, declined to comment on Monday’s market movement, but added that “there are procedures in place to enable the exchange to take disciplinary action if a user is found to be in breach of its rules.”
Some academic research suggests that computerized trading can have positive effects. In equity markets, researchers have found automated firms reduced trading costs and, contrary to popular opinion, improved market depth and stability.
“The performance of the algo is only ever as good as the programmer,” said Wolf of Marex.