New York's ICE Exchange Moves To Quash Sugar Price Spikes

LONDON -(Dow Jones)- The U.S.'s InterContinental Exchange (ICE) said Thursday that from next week it will resume the use of its "implied matching engine" in a bid to reduce price volatility in the market.

In a notice posted on its website, the exchange said it plans to cancel trades in its raw sugar futures market that fall "outside an acceptable price range" in the event of a price spike from March 1.

ICE defined a "price spike" as when the price of a commodity rises and then falls within 90 seconds or less; there is neither widely available news that clearly precipitated the spike nor similar trading patterns on related products; and the peak or trough of the spike is more than 150 points ($0.015) away from the equilibrium price as determined by the exchange.

The move comes as concerns have been building over huge price swings in the raw sugar market. Dealers were spooked this month when a flash fall in the New York market saw prices plunge in seconds, while in November they suffered their biggest one-day sell-off in 30 years.

According to press reports, Sean Diffley, chairman of the World Sugar Committee, an industry body which advises the New York-based exchange, blamed "parasitic" algorithmic computer traders for the current volatility.

"As you know, the exchange's popularity with members of the real sugar community is at a low ebb," he wrote in a letter to the ICE's chairman quoted by The Financial Times.

Turned off in 2009 in order to attract new players to the market, ICE's "implied engine" electronically matches different bids and offers to keep the market running smoothly.

Yet dealers remained unsure on how the move would affect the market. "What everybody wants to understand is what the rules are and I think the rules need to be clear," said a trader.

Algorithmic or "high frequency" traders use complex computer programs to dip into the market, exploiting minute price discrepancies by processing trades in a faction of a second. Critics say they distort markets by exaggerating moves and moving prices in ways unconnected to market fundamentals.

But Paul Conway, senior vice president of Cargill Inc., said the market has the capacity to correct itself without too much industry regulation. "If you start saying we won't allow certain investors to participate our view is it wont work as well," he said.

"Sugar's a relatively small industry and if you have a bunch of new players come in that overwhelm the market, the question is can it handle it? You either say: we're going to ban one type of trader or the market expands to accommodate them."

Others argued that the current spate of volatility is more down to high prices and tight market fundamentals than the influence of algorithmic funds.

"In the 1980s we similar volatility and daily ranges but we didn't have any black box funds," said Jonathan Kingsman of the influential Switzerland-based consultancy Kingsman S.A.

Raw sugar prices have doubled since last May to 30-year highs of over 36 cents a pound due to fears of increasingly tight world supplies. A succession of weather problems have slashed hopes a forecast surplus will materialize, leaving importers eating into stocks already drawn-down by two seasons of deficit.

"This volatility is more a function of the price and the uncertainty rather than blaming it on any particular sector," said Kingsman.

(Source: http://www.foxbusiness.com/industries/2011/02/24/new-yorks-ice-exchange-moves-quash-sugar-price-spikes/)