Frustrated energy options traders are exiting New York oil and gas pits for sugar and cotton as volatility sweeps through “soft” commodities.
Traders are migrating from New York Mercantile Exchange, an energy bourse on the third storey of a CME Group building in Manhattan, to a soft commodities exchange run by IntercontinentalExchange on the seventh floor.
The shift reflects divergent trends in volatility, which is vital to commodity options trading. Ample spare energy supply has stifled wild moves in oil and gas, while strong demand and weather problems have induced sharp moves in softs.
On Monday, ICE cotton surged by the daily allowable limit to an exchange record. ICE cocoa, also traded on the seventh floor, jumped after an export ban in Ivory Coast, the largest producer.
“Guys who were trading crude and natural gas downstairs are working their way upstairs,” said Roger Corrado, a softs broker with Spectron. “The volatility in our markets is pretty off the charts.”
A common measure of realised volatility in the Dow Jones-UBS softs subindex has soared 38 per cent in the past year. Volatility in the energy subindex has fallen 31 per cent.
Trading volume doubled in ICE cotton options in the fourth quarter of 2010 from a year earlier and rose by half in sugar options. Nymex gas options volume rose 7 per cent and oil volume rose 1 per cent.
Ed Hernandez, a natural gas marketmaker, recently moved to the seventh floor to trade cotton options. Volatility “is pretty much everything” he said.
“When I made my switch, cotton was limit-up every day. That’s the reason I jumped in here.”
Energy traders, used to following gas storage data and Opec statements, will have to get used to markets guided by obscure statistics on cotton stockpiles or tropical rainfall.
“But people are trading derivatives more than the fundamentals of any commodity,” said Mark Benigno of Hudson Capital Energy, an options dealer. “It’s a portable expertise.”
Steven Williams, volatility strategist at Louis Capital Markets, said thinly traded softs markets could quickly become saturated, cutting traders’ margins.
“Softs will be good for a while, but I know from my floor days that once people start talking about how good trading is, it’s the beginning of the end,” he said. “The easy money was likely made before the migration started.”
Nearly all commodity futures trading on CME and ICE now takes place on computer screens, but the complexity of options has kept traditional open-outcry trading floors busy.
ICE declined to comment on the shift. CME said: “Energy market participants typically trade a variety of products.”
