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By Ivy Schmerken Algorithmic trading is continuing its march through the asset classes. Proprietary commodities option trading systematic shops with experience in other asset classes are bringing algorithmic trading to commodities markets, according to several experts.
Nigel Kneafsey, CEO of Options IT, a provider of high-performance trading technology infrastructure as a service, says automated trading commodities option trading systematic are expanding into commodities, such as energy and agriculture. One of the reasons commodities are attracting new players and new strategies is that the markets are not as mature as equities.
Also, with more and more institutional money flowing into commodities, both through exchange-traded funds ETFs and listed futures and options, managers are looking for new ways to generate alpha in commodities. According to estimates, about 15 commodities option trading systematic to 20 percent of all futures trading occurs in commodities futures contracts. Some commodity trading advisers, however, rely on a combination of strategies that involve human discretion as well as programmatic rules.
Nautical Capital in Boca Raton, Fla. Nautical commodities option trading systematic trades three strategies — two discretionary strategies driven by the commodity views of the portfolio managers and one systematic strategy. The first discretionary strategy capitalizes on relative-value opportunities through inter-commodity and calendar spreads; the second is based on directional views and is implemented via options.
The systemic strategy, Dynamic Commodity Trading System, employs trend-following and fundamental algorithms to determine long, short or flat cash exposure to 15 commodities. There was a supply shortage, and the near-term March contract went from 9 cents per pound to peaks of commodities option trading systematic cents per pound, according to Carrier. Meanwhile, May sugar contracts were selling at a 10 percent to 15 percent discount on the March contracts. We are focused on the relationship between the two contracts implemented through a calendar spread.
Gary Stone, director of trading research and strategy at Bloomberg Tradebook, acknowledges that algorithmic trading is different in commodities than in equities. But, Stone points out, commodities algorithms are growing increasingly sophisticated. Bloomberg Tradebook, a subsidiary of Bloomberg, began offering programmed strategies for futures about five years ago. Some customers, according to Stone, wanted to bring equity futures algorithms to commodities, and many of the strategies that Tradebook has rolled out for commodities are similar to those used on the proprietary trading desks of bulge-bracket banks.
For example, Tradebook offers trailing stops, which allow a trader to trail the commodities market up while the computer automatically sets stop loss orders below the market price. This year, Stone reports, Bloomberg has made a push into intra-commodities trading or arbitrage. And they can do it with significantly less slippage and more precision.