Business Times - 08 Jul 2009
Dearth of activity during Asian trading hours can lead to erratic swings in prices
(SINGAPORE) The rogue Brent trades that roiled the oil market in the normally placid wee hours last Tuesday have again put a spotlight on the lengthy period of Asian illiquidity for the world's main commodity markets.
The sharp jump in prices and volumes on Brent - and gold's drop two months ago - ultimately had no lasting impact on world prices, but vexed Asian traders who face a constant dilemma: Keep large stop orders out of the market during thin Asian trade to avoid moving prices accidentally, or leave them open in the hope of a burst of liquidity like last week's.
There are several ways to lift liquidity, none of them quick: Find a few brave souls ready to break their routine and make an early market, develop an Asian exchange with compelling local contracts, or wait for China and India to unshackle thriving domestic exchanges to allow outbound trade.
'I think it will be a combination of a few factors; the centre of commodities trade is shifting east more and more, so there will be more demand for liquidity, and I guess there will be some incentives from the exchanges for market makers,' said Roberto Tassinari, a proprietary trader with Saxon Financials.
As global exchanges like the New York Mercantile Exchange and the London Metal Exchange adopted near-24-hour electronic trade over the past decade, they also tried to foster greater activity in the Asian time zone, both to establish their market position and to grow business in the fast-expanding region.
They have largely failed, resulting in global benchmarks for soybeans, oil or copper that are open for trade but nearly dormant for one-third of the day.
'It will take at least five to seven years to have adequate liquidity,' said a Singapore-based industry source who trades global commodities. The best hope, he said, is 'China opening up and moving from a price taker to benchmark setter'.
For now the market may have to live with the risk of the occasional jolt like the one that occurred around 9am Singapore time last Tuesday, when a series of roughly 500-lot bids by a rogue London-based Brent broker at PVM triggered a more than US$2 surge in prices .
The reaction would have been far more muted if the same volumes had gone through during the highly liquid US and European trading periods.
In a single hour more than 11,000 lots of Brent traded, over 10 times the norm for the entirety of the Asia time zone, but about average activity for the main 1000 to 2000 GMT period.
The incident - which PVM says cost it nearly US$10 million and is under investigation - comes just two months after an apparently mistaken sell order for Comex gold futures triggered a sudden US$10 fall in midday Asian trade, a sizeable move that dragged down spot bullion and roiled the market.
While the latest incident is sure to cause a new round of questions about broker trading controls, the more immediate issue for the growing ranks of Asia-based commodity traders is how to protect themselves from erratic, low-liquidity moves.
Some find hope in the growth of local contracts, from the birth of the Dubai Mercantile Exchange's Oman crude oil futures contract two years ago to the ASX's launch of an Australian thermal coal futures contract last week.
Several other exchanges in Singapore are also in the works, some trying to capitalise on strong Indian demand for more venues that sidestep currency controls as well as regulatory risks in a country where the government has been quick to shut down any contract it fears is stoking local prices.
In China, Shanghai copper and Dalian grains contracts have become important global weathervanes for those markets.
When adjusted to compare like for like per-tonne trading volumes, total volume in the Shanghai Futures Exchange copper contract is roughly equivalent to total LME trade, according to Reuters data.
The liquidity gap is acute.
Front-month Nymex crude oil futures traded an average of under 8,000 lots a day from 0000 to 0800 GMT in June; from 1200 to 2000 GMT they traded over 200,000 lots. The two front CBOT soybean contracts Sc2 trade some eight times more in just five hours of Chicago trade than in 12 Asian hours.
Exchanges are unlikely to consider curbing hours to reduce the market's liquidity exposure, although ICE Futures rowed back extended hours over the past two years after concerns about market liquidity and complaints from London brokers who were reluctant to staff desks at all hours.
Ultimately what's needed in the short term is a few more players like Peter Maguire, the managing director of Commodity Warrants Australia, who faced down sceptical traders over the past five years as he sought to fill orders during his daytime.
'We started trading during the day here and people told us nothing was going to get done. But we just put the bid in and it gets hit. In Delaware or Moscow or wherever, somebody is messing around on their Blackberry and sees a good trade.' - Reuters
Dearth of activity during Asian trading hours can lead to erratic swings in prices
(SINGAPORE) The rogue Brent trades that roiled the oil market in the normally placid wee hours last Tuesday have again put a spotlight on the lengthy period of Asian illiquidity for the world's main commodity markets.
The sharp jump in prices and volumes on Brent - and gold's drop two months ago - ultimately had no lasting impact on world prices, but vexed Asian traders who face a constant dilemma: Keep large stop orders out of the market during thin Asian trade to avoid moving prices accidentally, or leave them open in the hope of a burst of liquidity like last week's.
There are several ways to lift liquidity, none of them quick: Find a few brave souls ready to break their routine and make an early market, develop an Asian exchange with compelling local contracts, or wait for China and India to unshackle thriving domestic exchanges to allow outbound trade.
'I think it will be a combination of a few factors; the centre of commodities trade is shifting east more and more, so there will be more demand for liquidity, and I guess there will be some incentives from the exchanges for market makers,' said Roberto Tassinari, a proprietary trader with Saxon Financials.
As global exchanges like the New York Mercantile Exchange and the London Metal Exchange adopted near-24-hour electronic trade over the past decade, they also tried to foster greater activity in the Asian time zone, both to establish their market position and to grow business in the fast-expanding region.
They have largely failed, resulting in global benchmarks for soybeans, oil or copper that are open for trade but nearly dormant for one-third of the day.
'It will take at least five to seven years to have adequate liquidity,' said a Singapore-based industry source who trades global commodities. The best hope, he said, is 'China opening up and moving from a price taker to benchmark setter'.
For now the market may have to live with the risk of the occasional jolt like the one that occurred around 9am Singapore time last Tuesday, when a series of roughly 500-lot bids by a rogue London-based Brent broker at PVM triggered a more than US$2 surge in prices .
The reaction would have been far more muted if the same volumes had gone through during the highly liquid US and European trading periods.
In a single hour more than 11,000 lots of Brent traded, over 10 times the norm for the entirety of the Asia time zone, but about average activity for the main 1000 to 2000 GMT period.
The incident - which PVM says cost it nearly US$10 million and is under investigation - comes just two months after an apparently mistaken sell order for Comex gold futures triggered a sudden US$10 fall in midday Asian trade, a sizeable move that dragged down spot bullion and roiled the market.
While the latest incident is sure to cause a new round of questions about broker trading controls, the more immediate issue for the growing ranks of Asia-based commodity traders is how to protect themselves from erratic, low-liquidity moves.
Some find hope in the growth of local contracts, from the birth of the Dubai Mercantile Exchange's Oman crude oil futures contract two years ago to the ASX's launch of an Australian thermal coal futures contract last week.
Several other exchanges in Singapore are also in the works, some trying to capitalise on strong Indian demand for more venues that sidestep currency controls as well as regulatory risks in a country where the government has been quick to shut down any contract it fears is stoking local prices.
In China, Shanghai copper and Dalian grains contracts have become important global weathervanes for those markets.
When adjusted to compare like for like per-tonne trading volumes, total volume in the Shanghai Futures Exchange copper contract is roughly equivalent to total LME trade, according to Reuters data.
The liquidity gap is acute.
Front-month Nymex crude oil futures traded an average of under 8,000 lots a day from 0000 to 0800 GMT in June; from 1200 to 2000 GMT they traded over 200,000 lots. The two front CBOT soybean contracts Sc2 trade some eight times more in just five hours of Chicago trade than in 12 Asian hours.
Exchanges are unlikely to consider curbing hours to reduce the market's liquidity exposure, although ICE Futures rowed back extended hours over the past two years after concerns about market liquidity and complaints from London brokers who were reluctant to staff desks at all hours.
Ultimately what's needed in the short term is a few more players like Peter Maguire, the managing director of Commodity Warrants Australia, who faced down sceptical traders over the past five years as he sought to fill orders during his daytime.
'We started trading during the day here and people told us nothing was going to get done. But we just put the bid in and it gets hit. In Delaware or Moscow or wherever, somebody is messing around on their Blackberry and sees a good trade.' - Reuters
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