Is it because energy futures have unique risk-qualities? That there is something special about historical relationships of risk in these markets? That they attract a particular brand of quant. trader? Um, well, yes and no.
From Futures Industry Magazine:
Energy is one of the hottest areas for algorithmic futures trading right now. Especially for the high-frequency trading community. Over the past two years, the IntercontinentalExchange has invested heavily in its technology platform to make its energy futures market more attractive to algorithmic traders, improving both its speed and capacity. Once the New York Mercantile Exchange listed its crude oil contract for round-the-clock trading on Globex in August 2006, the race was on.
“As soon as Nymex moved to Globex, we started getting calls,” says Jesper Alfredsson, head of algorithmic trading at Orc Software. “The Globex platform is well known to algorithmic traders, and the arbitrage with ICE is suited very well for that kind of trading.”
Both exchanges offer a FIX-based application programming interface and both permit trading firms to locate their servers close to their matching engines. (See “Co- Location Catches On”.) This gives electronic traders rapid access to their markets, with order message round-trip times measured in milliseconds.
In June of this year, Nymex gave another push to the trend, listing options on its energy and metals futures on the Globex platform. Alfredsson sees this as especially interesting for options market makers active in other electronic options markets, who can now apply the same automated quoting technology in a class of options that up to now have traded either on the Nymex floor or in the over-the-counter markets, neither of which is suited for algorithmic trading.
The lesson? The content of the contract is pretty arbitrary compared to the institutional mechanism that determines the trading strategy.
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