An increase in high-frequency trading in commodities is boosting the short-term correlation between prices for raw materials, including oil and food, with stocks and other assets, a study found.
From the collapse of Lehman Brothers Holdings Inc. in September 2008, commodities have developed a correlation with U.S. stock markets at periods from one second to five minutes with the advance of high-frequency trading, which uses algorithms to analyse markets and execute orders, according to a study by Geneva-based economic affairs officers David Bicchetti and Nicolas Maystre at the United Nations Conference on Trade and Development.
“High-frequency trading strategies, in particular the trend-following ones, are playing a key role,” Bicchetti and Maystre wrote. “The financialization of commodity markets has an impact on the price determination process. Commodity markets are more and more prone to events in global financial markets and are likely to deviate from their fundamentals.”
High-frequency trading became more prevalent with technical innovation and introduction of full electronic trading, and also as investors opted for more active strategies, according to a copy of the forthcoming UNCTAD discussion paper posted on the Munich Personal RePEc Archive on March 20.
Increased correlation with other assets “questions the diversification strategy” in commodities, according to the report.
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