As the world becomes more digital, commodity investors should brace for a more digitized market environment incorporating algorithmic trading and use of cryptocurrency. Digitization has been embraced by most investors since it levels the playing field in as far as acquisition and use of information are concerned. Algo trading is coming to trading commodities.
The growing popularity of cryptocurrencies on the hand has been received with mixed feelings due to their largely decentralized nature and lack of sufficient regulation. Algorithmic trading is already a reality with companies such as BayWa, an agricultural trading company in Germany which has developed a computer-run quantitative trading system. Cryptocurrencies will soon enter the market after the United States Commodity Futures Trading Commission approved Bitcoin exchange by granting Swap Execution Facility (SEF) status to LedgerX, well-known a cryptocurrency exchange.
The Rise of Algo Trading
Commodity traders are gradually coming to grips with the growing influence of algorithmic programs and computerized models on commodity prices. It is hard to deny the fact that digital forces have a major impact on the way raw materials are bought or sourced and sold. Systematic algorithmic investing has been a hot topic in most sectors including commodities trading.
The German agricultural trading company, BayWa, has been working with the Quantumrock Capital, another German fund company which focuses on developing trading strategies that rely on high-frequency mathematical systems. Their goal is to understand how automated trading models can increase market insights and provide better price predictability.
Commodity trading has always been driven by factors related to supply and demand of raw materials. Players who have more information about supply and demand factors have always had an advantage over their fellow market participants. With increased access to available information for all marketers, thanks to digitization, there’ll be greater transparency and a leveled information playing field for all players.
Computer models will also provide, besides the broad supply and demand factors, concrete information on technical factors and macro aspects such as equity movements, foreign exchange, and interest rates. In fact, a large percentage of all the daily volume trading happening today comes from algorithm systems.
Trading in Bitcoin
Most players in the cryptocurrencies world were taken by surprise after the US Commodity Trading Commission granted LedgerX a Swap Execution Facility status. This is a great achievement for the company in its plans to become the first exchange, recognized federally, to provide Bitcoin trade options. The last step in this goal is to get approval from the CTC as a recognized Derivatives Clearing Organization or DCO. After it has been granted DCO status, LedgerX will be a federally regulated exchange and clearinghouse offering Bitcoin options in the institutional market.
However, some traders are of the opinion that due to the decentralized nature of cryptocurrencies, including Bitcoins, the currencies should not be influenced by government regulatory boards. Others argue that the rising popularity of cryptocurrencies calls for greater regulation to ensure that there is stability and a more secure environment for institutional investors. Regardless of these arguments, we cannot escape the fact that algo trading and Bitcoins will soon be a major part of commodities trading as the world becomes more digital.