Cocoa traders demand circuit breakers

By Jack Farchy in London , Financial Times, 2 Mar 2011

Cocoa traders have urged a leading commodities exchange to look at introducing "circuit breakers" in the market after the main US cocoa futures contract plunged 12.5 per cent in under a minute on Tuesday.

The collapse on the ICE cocoa contract, which was reversed almost as quickly, drew comparisons with the "flash crash" that hit Wall Street last May, prompting vigorous debate about the role of high-frequency trading, which uses ultra-fast computer algorithms to seek out pricing and other discrepancies in markets.

The push to introduce cocoa circuit breakers, which would interrupt trading when prices move beyond a stipulated limit in a short space of time, follows a similar move by sugar traders concerned about volatility in the ICE raw sugar contract.

ICE May cocoa tumbled more than 12.5 per cent in seconds at about 10.30am New York time on Tuesday, dropping to as low as $3,217 a tonne. Almost as quickly, it recovered to about $3,600, down just 2.5 per cent on the day.

Traders said the plunge was caused by a large sell order, which in turn triggered "stops", or automatic orders to sell, driving the market lower. Following the move, the exchange cancelled all trades below $3,400 a tonne, under regulations on price spikes.

Any investor who bought cocoa futures below $3,400 and then sold a few minutes later when the market rebounded above $3,400 would have been faced with an unexpected loss, brokers said, since the purchase would have been cancelled, but not the sale. "There are an awful lot of unhappy people," one broker said.

While the exchange has published guidelines governing the treatment of price spikes, or sharp moves that are reversed within 90 seconds, traders said it was difficult to calculate exactly where trades would be cancelled.

"In the heat of the moment, it is very hard to realise exactly which trades are going to be valid and which are not," a trader said.

The talks with the ICE Futures US exchange were ongoing and at an early stage, traders said.

Circuit breakers exist already in other commodities markets, including oil.

The New York Mercantile Exchange stops trading on its West Texas Intermediate oil futures contract for five minutes when prices move to more than $10 a barrel.

(Source: http://finance.ninemsn.com.au/newsmarket/commodities/8218928/cocoa-traders-demand-circuit-breakers)