From the Wall Street Journal:
Veteran natural-gas trader John Woods has a simple trading strategy around data on U.S. gas stockpiles: Stay away.
Mr. Woods and other floor traders on the New York Mercantile Exchange used to look forward to the weekly report of gas-inventory figures by the U.S. Energy Information Administration, widely considered the best reading of gas supply and demand in the U.S. Traders would be glued to their computers before the data's release at 10:30 a.m. on Thursdays, ready to dive into the busiest trading window of the week.
But in the past few months, unusual trading patterns have pushed many seasoned traders to the sidelines. One reason for the irregular activity is a strategy known as "banging the beehive," in which high-speed traders send a flood of orders in an effort to trigger huge price swings just before the data hit.
High-frequency traders using a range of strategies target natural gas because of the wide gaps between the prices offered to buy and sell the futures contracts, which can lead to easier profits, says D. Keith Ross Jr., who runs the trading platform PDQ Enterprises LLC and was until 2005 chief executive of Getco LLC, a prominent high-speed trading firm. "You can make some serious money" in natural gas, he said.
Mr. Woods, head of JJ Woods Associates, says staying out of the market costs him broker fees and missed opportunities to profit from price swings, but jumping into the fray is too risky. "I just let the computers get in the ring and bang each other around," he said.
The shifting landscape in natural gas shows how high-speed traders are changing markets well beyond stocks, which so far has been the primary focus for regulators and lawmakers investigating rapid-fire trading....MORE
...Each week before the EIA report, many traditional investors place electronic orders to buy or sell futures above or below the prevailing price, called resting orders. A trader anticipating a large inventory increase might expect pressure on prices, and offer to sell natural gas at below the current price ahead of the report. If the trader is correct, the market typically would fall and the trader's "sell" order would be filled near the start of the decline, ideally at a profit.
Analysts and traders say high-speed firms "bang the beehive" in a bid to exploit these resting orders. Just before the data land, some traders flood the market with offers to fill the resting orders just above or below the current futures price. They hope to trigger enough orders to move the market in a given direction before the data hit.
If such tactics are successful, no matter what the data show, the flurry of trades will create wide swings that present opportunities for the rapid buying and selling that is high-frequency firms' stock in trade....
