From the October 2013 issue of Futures Magazine • Subscribe!

Nothing crude about it

No doubt about it, electronic trading has changed the world, and mostly for the better. It has allowed the trading industry, and volume, to grow exponentially; it has lowered the bar to entry and  brought in new, vibrant players; and it has opened the world of trading from what some would call an old boys’ club to a global, multilateral, multi-platform business of tighter spreads and discovering the best price for all.

But not everyone sees it that way. Some don’t believe electronic trading has been an industry savior, but has, in fact, introduced new problems to the marketplace. For example, would the Flash Crash have happened without electronic trading? And would the new boogie men have appeared, such as high-frequency traders and index funds, groups that definitely provide liquidity, but not perhaps the right kind.

Dan Dicker, a former New York Mercantile Exchange (Nymex) local, believes electronic trading actually has ruined the energy market, more specifically crude oil. He believes the premium in crude oil is now around $26....all brought about by HFT and funds buying and selling crude on fear and not anything tied to  true fundamentals (see How electronic trading changed (ruined) crude oil prices,” page 14).

Realize Dicker isn’t a former floor trader who couldn’t let go. He left the exchange floor a multi-millionaire, because of the Nymex initial public offering, and has moved on to become a successful television and web commentator, author, analyst and provocateur. And he still does well trading, having learned how to change his style to adapt to the world of upstairs trading. 

And as would be expected of a former floor trader, especially an energy trader, Dicker doesn’t hold back. He thinks the futures exchanges have been blinded by HFT and have forgotten their purpose of providing a fair and orderly market. He notes that West Texas Intermediate crude oil hasn’t been priced correctly in the last couple of years, stating that it hasn’t mimicked any other global crude oil, and the result is every oil consumer is paying too much for it and the byproducts.

But crude oil pricing is only part of the energy conundrum. He says the natural gas market has been mismanaged by government, environmentalists and especially drillers, and is a travesty. The United States already should be a natural gas-based economy, but it isn’t, Dicker says, because of this massive mismanagement. We should be able to thumb our nose at problems in the Middle East and other crude hot spots, but can’t because we’re still a crude-based economy.

And he’s right. The mismanagement becomes apparent when seeing how natural gas is priced elsewhere in the world, but is in the doldrums in the United States where the mad dash to drill and frack resembled the 1849 gold rush. The result is over drilling and the need now to cap wells. Meanwhile, natural gas prices languish around $3.50 per MMbtu.

And where are oil prices headed? Our analysts provide their forecasts in “USA: Energy producer to the world?” With the United States fast becoming a key exporter of products, as well as growing self-sufficient in energy production, the days of oil price shocks might be over. Still, the recent troubles in Syria, albeit a small oil producer, still have caused a “fear” premium in crude oil. After all, global supplies are down overall and China is still hungry. And possible military action still is a factor that currently is pushing prices higher, and probably will for some time.

The energy complex is one of the most interesting to trade because of all the drama. In this issue, we cover all its aspects, even looking how the big boys trade in, “Got volatility? Use OTC markets as a guide to arbitrage”. Even if electronic trading has caused havoc in crude oil, it’s certainly not more dramatic than the events that make this commodity pulsate on a daily basis.

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