The breaker, which was only introduced in the soft
contracts on April 9, was activated as Arabica prices on ICE Futures U.S. sank
4 cents, equivalent to 2.2 percent, in just 15 seconds at 11:18 a.m. EDT (1515
GMT). The Atlanta-based exchange operator has introduced these interval price
limits (IPLs) in softs and other contracts to try and prevent price spikes that
are often associated with high-speed electronic trading. Similar systems have
been in place in equities for quarter of a century. The system may have prevented further declines-traders.
April
25, 2012
(Reuters) - A sharp,
swift drop in coffee prices on Wednesday triggered IntercontinentalExchange
Inc's new circuit breaker for the first time since the new system was launched
just over two weeks ago to prevent extreme price volatility.
The breaker, which was
only introduced in the soft contracts on April 9, was activated as Arabica
prices on ICE Futures U.S. sank 4 cents, equivalent to 2.2 percent, in just 15
seconds at 11:18 a.m. EDT (1515 GMT).
Profit taking and
chart-based selling appeared to have caused the tumble, traders said.
The sudden and
dramatic fall to $1.758 per lb was enough to trip the circuit breaker, which is
designed to prevent unintended and large price swings, or flash crashes,
putting the market on hold for 30 seconds.
During that time, the
affected futures contract - in this case July -
continued to be traded but only at or above that base price and prices moved
higher once the hold expired, the exchange said.
The Atlanta-based
exchange operator has introduced these interval price limits (IPLs) in softs
and other contracts to try and prevent price spikes that are often associated
with high-speed electronic trading. Similar systems have been in place in equities
for quarter of a century.
Many traders either
didn't notice the 30-second break or were more concerned by the sudden plunge
in prices, which triggered sell-stops and sent the market even lower.
"Most people
didn't notice because it was so quick. Most of the market was in shock that
coffee had been doing well and suddenly it was lower," said a source at a
hedge fund whose broker alerted him to the break. He used the 30 seconds to
take back some positions.
But with prices
holding above the $1.758 mark for the rest of the day, market participants
agreed the system likely prevented further systematic selling, even if the
trading range of 10 cents was still unusually wide.
"When it
happens, it's instantaneous. These circuit breakers are a good idea," said
a veteran floor trader of these extreme moves.
A year ago the ICE
cocoa futures market plunged more than 11 percent in seconds before rebounding
a minute later, and many suspected computer-generated dealings. ICE canceled
some trades as traditional players complained of market distortion.
July arabica futures
on ICE eventually finished the day down 6.75 cents, or 3.7 percent, at $1.7675
per lb, but remained above last week's 18-month low, basis second month, of
$1.739 per lb.
Traders were not
surprised that coffee, which is prone to wild swings amid low liquidity, was
the first of ICE's contracts to set off the breaker system.
"Coffee is
historically highly volatile and has the highest margins. It doesn't surprise
me at all," the fund source said.