Has commodities trading become harder due to machine trading today?

H

helpme_please

One more commodity hedge fund bites the dust. Same excuse. Machines are distorting the commodity markets and making the lives of fund managers more difficult.

I don't trade commodities. However, I find it hard to accept his excuse. If machines distort the markets and make them diverge from fundamentals, wouldn't an inefficient market make it easier for skilled money managers to make money? Isn't that value investing is about? Taking advantage of the market when it is trading away from the fundamentals. Why are these skilled highly paid professional money managers complaining?

Maybe I missed something as I don't trade commodities.

https://www.reuters.com/article/us-...nds-close-as-computers-dominate-idUSKBN1FW0E4

Ward blames the rise of computer-driven funds and high-frequency trading for forcing him and some other well-known commodities investors to close their hedge funds and look for opportunities where machines can’t make a difference.

While computerized trading is not new, Ward and others argue its steady rise has reached a tipping point that is distorting prices and creating uncertainty not only for investors, but for chocolate firms, carmakers and others who rely on commodities.

It was in January 2016, after a slide in cocoa prices, that Ward decided the days of traditional commodity investors doing well from taking positions based on fundamentals such as supply and demand may be numbered.

“It was just too big, too quick, too dramatic. And completely against the fundamentals,” Ward told Reuters.


Commodity markets fell across the board that month after weak factory data in China raised fears of lower demand from the world’s top consumer of raw materials.

Ward blamed the slide in cocoa on what he regarded as misplaced selling by computer-driven funds reacting to the Chinese data, given China has scant impact on the cocoa market.

“The actual fundamentals in cocoa were extraordinarily bullish in January 2016. We were forecasting the largest harmattan in history, which is exactly what happened,” he said.

His prediction that a hot, harmattan wind from the Sahara desert would hit harvests in Ivory Coast and Ghana and drive cocoa prices higher did come to pass - but not before the fund had been forced to cut its losses when the market slumped.

At the end of 2017, Ward closed the CC+ hedge fund that had invested in cocoa and coffee markets for years.
 
helpme_please said:
His prediction that a hot, harmattan wind from the Sahara desert would hit harvests in Ivory Coast and Ghana and drive cocoa prices higher did come to pass - but not before the fund had been forced to cut its losses when the market slumped.
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Also, this part is telling...maybe if he'd used a computer to calculate position size he'd have gotten it right.
 
I love this story....cocoa market had already discounted a tight market....then went down went down on lower demand fears....and reversed back up when the winds hit.
Sounds like a rational market to me.
I say: "Anticipate the anticipations".
Many fund managers cannot do this. Thus they blame the algos....instead of themselves.
 
I am by far not a trend trader when it comes to very long term commodity trading, very few trade as I do, and ones that do are more along the lines of producers/farmers. I am actually in process of designing systems and in couple years plan on starting a Hedge fund with my best buddy. I do use Math, some physics and cycling, and a Great deal of charting and limited TA. But when it comes to stock trading, trend is your friend. People do not realize that commodities are the hedge for the underlying, they are opposites in a way.

From a dozen of Hedge funds I have spoke or know about, most use no charting or very limited, many come from outside of the "trading" side of the markets, they very educated, but many of their algorithms break down in few months or lucky few years, whereas charting, been around hundreds of years, and it is based on human emotions. And yes, some guy way in the back in some corner is making algorithms based on human emotions. You study your screen long enough, 10,000-20,000 hours you can find extremes of emotions and many are programmable.

There are very very few that have stood the test of time in their field and why they make the incredible money they make most years. James Simons of Renaissance maybe the best.

And using math, you can get really good at defining risk, but to predict the markets-impossible or these guys would own the world. Let's face it, no one usually cares to discuss risk management, it is boring usually, cold, and not much excitement when you are discussing the Bell curve or so many deviations from the norm, cycling another boring subject to most and yet those who can achieve to a degree reoccurring cycle extremes on a fairly consistent basis are defining risk, and risk can mean the same as you know the card deck is loaded with face cards and the dealer is showing a "6" and should you double down with your 2 "Aces". It won't guarantee you will win, but it gives you odds and up to you to load up.

As far as Ward, he not a chart reader, 2014 and 2015, on monthly you can't see triple top with 2016 right shoulder of a H&S, huge times to sell, and you can tell, be long or be gone eventually in Cocoa/hedge at this time of making lows.

CCM.GIF
 
helpme_please said:
You're right. I wonder what he saw that readers of the articles missed out.
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helpme_please said:
While computerized trading is not new, Ward and others argue its steady rise has reached a tipping point that is distorting prices and creating uncertainty not only for investors, but for chocolate firms, carmakers and others who rely on commodities.
More...

Also from the article:

...Farmer and others say, however, that it is unfair for exchanges to allow high-frequency trading (HFT) groups to have co-location platforms, allowing them to put super-computers in the same data center as the exchange servers.

They say that gives HFTs the tiny advantage they need to jump ahead of incoming orders, effectively piggybacking. Traditional investors say this exacerbates market moves and in turn makes it more costly for them to take out hedges when price moves go against them...
 
Frederick Foresight said:
You guys are pretty quick to write off the concerns of someone who made his living in the markets for nearly 4 decades.
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Two of which were dominated by computers. (And having just seen your follow-up post--Ok, fair point).

I wasn't so much writing him off as saying it's pretty much de rigueur for out-of-work late career traders to show "-Beaten by machines" on their resume. Those that still have jobs have a different refrain: "my reactions have slowed and I adjusted my trading based on that." That seems a pretty relevant point, particularly in the commodities markets (so I'm told, no first-hand experience myself) where producers who rely on commodities are up against algo-based computing (and thus less sophisticated and presumably more easily manipulated for their predictable patterns of market behavior).

It's one thing when the Cattleman's Beef Assn. is saying its members are getting discouraged by what they're seeing in the market (disappearing bids, for example). It's something entirely different when we hear the same tired excuse from people who did not adapt to their evolving industry.

I don't mean to call any one person out on this specifically, but in general, I think it's a cop-out for people unwilling to admit their own failings.
 
Handle123 said:
Let's face it, no one usually cares to discuss risk management, it is boring usually, cold, and not much excitement when you are discussing the Bell curve or so many deviations from the norm, cycling another boring subject to most and yet those who can achieve to a degree reoccurring cycle extremes on a fairly consistent basis are defining risk,
More...
Who said risk management isn't exciting?!

(dear lord, I'm a dork).
 
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