Speer: Futures Also Broken….?
During the past week, I stumbled into some commentary regarding the current state of the futures market:
"CME cattle futures are paralyzed and penalized by the algos and the high frequency traders who focus on geopolitical unrest and a soaring corn market to add to volatility and uncertainty….What once was a viable and sensible risk management tool has been turned into something barely recognizable. Many who trade cattle futures know nothing or their fundamentals and action is many times dominated by money flow as large positions are rolled from one month to the next dominate price movement."
The implication here being speculators are dominating price movement. Therefore, futures markets are NOT working as a risk management tool because of too much “volatility and uncertainty”.
Let’s start there; what’s the data say?
One-day-does-not-a-market-make – accordingly, the attached graph represents the weekly average of daily closing prices of the front-end contract versus the week prior (measured as an absolute percentage). In other words, in either direction, how much did this week’s daily average differ from the previous week? The trendline reflects the 52-week moving average (because if there’s a structural change, per the commentary, we’ll see that in the longer run trend).
The overall average change week-to-week since 1990 is roughly 1.6%. That’s ebbed and flowed over time; the most recent peak (not surprisingly) came in the midst of Covid. Weekly volatility has since plunged to roughly 1% (nearing all-time low). Clearly, “volatility and uncertainty” in the live cattle futures contract has NOT amplified over time.
None of this is new; this sort of grumbling has been around since the beginning of futures markets. None of it is helpful; it merely serves to stoke cynicism. That said, there’s lots more to unpack here in future columns. More to come.
Nevil Speer is based in Bowling Green, KY and serves as Director of Industry Relations for Where Food Comes From (WFCF). The views and opinions expressed herein do not necessarily reflect those of WFCF or its shareholders. He can be reached at nspeer@wherefoodcomesfrom.com.
