Political Metals

On April 26, three trading days before the “drive-by-shooting of silver” resulting in the $6 takedown in 12 minutes, the CME group announced that it had reached record volume the previous day in its COMEX Silver futures, as well as in open interest of its Silver options.

Yesterday, trading of Silver futures reached 319,204 contracts, surpassing the prior record of 201,216 contracts set on November 9, 2010. At the same time, open interest in Silver options reached a new record of 240,344 contracts. The prior record of 235,992 contracts was set on April 21, 2011.

This record volume for Comex Silver futures in April was almost six times the average monthly volume of the last decade. Many attributed this high volume preceding the May 1 silver take-down and the speed & depth of the “crash” itself to High Frequency Trading (HFT) - the robotic execution of trades by powerful computers “capable of buying and selling thousands of different securities in the time it takes you to blink an eye“.

This CBSNews video The Speed Traders gives a rare behind-the-scene insight into the lightning fast but dark world of HFT.

Consider these stunning facts:

• Over 70% of stocks traded in the US are done through HFT robots. No humans are behind these trades because “humans are way too slow to trade on the kinds of opportunities that we’re trying to capture. We’re trying to capture opportunities that exist for only fractions of a second.”
• Their supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines
• High frequency traders typically tell their computers to make a profit of a penny or less, 40 million times day.
• Speed in accessing raw data from the stock exchange is so critical that these traders rent expensive data center space so that their machines can be physically close to the exchange’s computers.
• Gaining a few milliseconds may make them millions, if not billions a year
• High frequency trading raises no capital for companies, if anything it’s distracting from the capital raising process
• Proponents of HFT say that they benefit the market by providing liquidity, so that when humans or natural traders want to buy or sell, there’s always a counter-party to the trade.
• Others, like William Silver, disagrees…  ”the volume in most issues is vastly inflated by HFT activity, and many computer models being used to acquire and liquidate large positions are built on false liquidity assumptions. This is no problem when markets remain calm. However, once there is a rush for the exits, institutional holders will find that their assumptions on liquidity were incorrect, and we will then experience another mini crash.”
• There are a lot of people out there who think that the stock market is rigged
• “Since we first aired this story, the Securities and Exchange Commission has proposed further reforms, and high frequency traders are now moving into currency and commodity markets“. - CBS News.

And this was exactly what Ted Butler said in his commentary after the May 1 silver price take down.

the record high trading volume and 30% price smash indicate there was little true liquidity present. This is due to a disproportionate share of trading being performed by HFT computer bots. Why are these traders allowed to exist and control so much a share of silver trading?

The ball is in CFTC’s court.

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Related Reads on HFT in commodities, particularly gold & silver

• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC.
• “Speed” - Speech by Commissioner Bart Chilton before the High Frequency Trading World, USA 2010 Conference, New York, NY
• Silver Might Crash?

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