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High-frequency traders, who've been blamed in recent years for disruptions in equity markets, have drawn additional attention over their activity in commodity futures such as natural gas. But what's happening is really nothing new, according to economist Craig Pirrong.
Competition among HFT firms has narrowed bid-ask spreads in equities to "virtually nothing," so these traders are looking for markets with fatter margins, which is why they are moving into commodities, Pirrong wrote on his Streetwise Professor blog.
"That's the way markets are supposed to work," Pirrong wrote. "New entrants lead to reduced prices and drive returns to just cover the cost of capital. That's exactly why some veteran traders are spooked. They can't compete against HFT."
For veteran traders, their "oxen are being gored, just as traditional market makers' oxen were gored in equities," Pirrong said. He expects bid-ask spreads in natural gas, and commodities generally, will narrow as HFT technology and capital moves into those markets.