When natural gas prices dropped by 8 percent in a matter of seconds in the early hours of Asian trade last week, one New York-based hedge fund manager said he didn't have to think twice.
"The moment I heard, I ran, literally ran, to my computer and started buying," he said. "It was clear it was an HFT algo gone bad and I could profit on the rebound off the lows."
He wouldn't have been the only one.
Since the infamous "flash crash" in equity markets in May 2010, that was exacerbated by high-frequency trading (HFT), seasoned traders say that violent, often inexplicable price moves are becoming more common, and allow those who are fast enough to book a quick profit as prices bounce straight back up.
In commodity markets, which have been hit by a series of mini flash crashes over the last 18 months, experts say there could now be an influx of more high-speed computer-based traders that have honed their techniques in the cut-throat equities markets -- the fastest and most electronic on earth.
Though such firms have traded commodities for years, some traders and experts say they are now applying new and more aggressive strategies that have stunned traditional players.
Such high-frequency trading -- in which rapid-fire machines place thousands of very short-term bets, making markets and profiting on tiny price imbalances -- could double from around 15 percent in two to three years, leaving commodity exchanges and regulators running to catch up.
Jeffrey Sprecher, CEO of commodity futures powerhouse IntercontinentalExchange Inc, told reporters last week exchanges are working on ways to target "unintended" price spikes, without losing the benefits -- and volumes -- HFT firms bring.
"I think it's incumbent on the exchanges to solve this. I think customers are going to lose faith in us if we don't."
HFT AND THE MAY 5 OIL CRASH
Commodity traders are increasingly blaming computer-driven activity for a series of anomalous price movements ranging from quick blips in natural gas and cocoa to deeper, longer-lasting jolts like the one that shook oil on May 5.
On that day, traders were shocked by the speed and violence of a record $13 intraday plunge, as sell-stop after sell-stop was triggered, despite the absence of a major news event.
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