News accounts for just 1/3 of commodity price moves-study

Thu Mar 21, 2013 11:12am EDT

* Up to 70 percent of price moves are "self-generated"

* Commodity markets seen as susceptible to price shocks

By Emma Farge

GENEVA, March 21 (Reuters) - Only about a third of commodity price moves are caused by news, reflecting the growing role of high-frequency trading in steering prices, according to a study selected by the International Monetary Fund.

The study, co-written by researchers at the United Nations Conference on Trade and Development and ETH Zurich, may spur regulators who blame traders for price volatility.

High frequency trading involves rapid-fire computers which place thousands of bets within the space of a second.

"At least 60-70 percent of commodity price changes are now due to self-generated activities rather than novel information," according to the 56-page study published this week.

"In our view, this evolution partly reflects the development of algorithmic trading and of high frequency trading in particular."

The study comes at a key time for the European Union which is scrutinising a law that puts curbs on high frequency trading.

While high frequency trading is thought to account for more than half of all U.S. equity trade volumes, its role in energy and agricultural markets is less well understood.

Some blame the group for a series of mini flash crashes in commodity prices, such as a $13 intraday plunge on oil prices in May 2011 and a sudden dive in Brent prices last September.

Supporters of high frequency trading say they bring much-needed liquidity to futures markets, helping to match buyers with sellers.

"Commodity markets are becoming very financialised and computerised. They are becoming more susceptible to minor shocks," one of the authors Vladimir Filimonov told Reuters.

The paper studied data on oil, corn, soybean, sugar and wheat prices between the mid-2000s and October 2012.

It was selected as part of an IMF forum 'Understanding International Commodity Price Fluctuations' organised with Oxford University. For a link, see here:here (Additional reporting by Huw Jones in London; editing by Ron Askew)