Flash trading ‘needs regulation’

Maize producers are concerned about the effect of a relatively new computerised commodity trading practice known as ‘flash trading’ and its effect on grain markets.

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Chris Schoonwinkel, maize producer from Wesselsbron and executive committee member of Grain SA (GSA), raised the issue at the recent GSA congress. He had conducted an in-depth investigation into flash trading and explained that it could cause serious fluctuations in the market.

“Flash trading allows traders to view orders from other market participants a fraction of a second before others in the marketplace,” he said. Schoonwinkel first became aware of the impact of the practice in February when the prize of maize for delivery in March 2012 unexpectedly dropped from R2 800/t to R2 100/t. After investigation, he found that the unexpected drop had been caused by flash trading.

According to him, it had to be accepted that flash trading was here to stay, but regulation was necessary. “Flash trading is successfully regulated in Europe where companies making use of the practice are taxed on every transaction. The companies are also compelled to remain in the market for longer to even out the playing field for all market participants,” he said.

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Chris Sturgess, director for commodity derivatives at Safex, denied that flash trading – or high frequency trading (HFT) as it was more commonly referred to – took place at the exchange. The local grain market processes about four orders per second with a 7:1 order-to-deal ratio. This means that for every seven orders there is one deal concluded. Sturgess said that this ratio confirmed there was no HFT taking place on Safex, or the numbers would have looked totally different.

He indicated that all the market fundamentals should be taken into account when the downward price move – from R2 722/t on 9 January to R2 165/t on 22 February for white maize delivered in March 2012 – was considered. This six-week price move is not typical when HFT participation takes place. “On regulation, I agree 100% with Mr Schoonwinkel,” Sturgess said.