The algos and HFT players in the futures and stock markets are taking advantage of the increased volatility and scaring the pants off the public. I was in the S&Ps from 1985 to 2014 and have been part of every major stock market event. I did all the UBS program trading business in the S&Ps, and our desk took a $5.3mil hit in the FLASH CRASH, and I am here to tell you that the algos are stretching out the up and down moves, and it’s starting to scare investors and the public.
The ESU15 was trading at 1908 late last Friday into the close, just before it started to rally 20 handles late in the day, and closed at 1918. On Sunday night the ESU rallied up to 1944.50, made another new high during Monday night’s Globex session, and rallied sharply Tuesday and Wednesday. When I told people I thought you had to sell the rally after the ESU traded up to 1992, and that it was going back to 1950 on Wednesday, I knew there was a high level algorithmic trading going on in the S&P futures, but when the ES dropped down to 1926 yesterday morning, it was clear the algos had taken over. The moves are not 10 to 15 points or even 20 to 30 points, no they are 40 to 60 handles moves every day, and algorithms have fully taken advantage of the uptick in volatility. It’s almost like the jump in volatility has has opened the floodgates for the algos. I have never seen the S&P go from overbought and oversold like we have seen over the last few weeks. The daily extremes have been frightening to the average investor. Seeing the DOW Jones drop 1,100 points and rally 1,000 or like Wednesday a 400 point reversal. I have said many times that we have never seen the likes of the movement that we are seeing today, I will put my 38 years of being on the floor on it. The algos are pushing the S&P around so much they are to blame for a lot of the intra-day margin calls as the ESU15 moves from sharply higher to sharply lower in a matter of a few hours. The computers have completely changed the complexion of the markets and trading.
Yesterday, Nanax displayed some of the things I have been talking about. Most traders think the algo’s only trade from the 8:30 CT open to the 3:30 PM close, but that’s not how it works anymore. The new algos trade 24-7 and ‘overnight trading’ has become a big part of the game. The example below is the S&P 500 futures (ESU15:CME) yesterday morning that resulted in a brief halt of the futures. According to the electronic trading authority, Nanex large orders were “spoofing” the S&P’s lower this morning at 5:51 ET, and then reversed the direction spoofing the market higher as the spread between the ESU15 and other index futures were widening before a 15 second trading halt. Then 20 minutes later the futures had to be halted again to return to alignment. MrTopStep has been ringing the bell warning of the potential dangers of electronic trading for sometime, and you know what? this kind of spoofing occurs everyday!
http://www.financialjuice.com/news/2309819/What-Happened-At-612-AM-This-Morning.aspx?ref=22
In Asia 8 out of 10 markets closed modestly lower, and in Europe 12 out of 12 markets are trading this lower morning. Today’s economic calendar includes PPI-FD, Consumer Sentiment and the Treasury Budget.
September Quad Witch Expiration Week Up 18 of the last 24
Our View: You want the truth? The truth is that the S&P futures have been completely and totally run over by the HFT and Algorithmic trading programs. The truth is that these programs are making up as much as 75% of the daily volume, and the truth is that they are moving the S&P much further and much quicker than it would normally move. That’s the problem, this is the new normal and it’s going to last all the way into the middle of October.
Fridays are sketchy with 11 of the last 15 being down, easily the worst performing trading day of the year. That, my friends, is an ugly stat. It’s 7:00 PM CT and the ES is trading 1941.25. As much as the S&P acted like they just couldn’t put the ES away, but the fact that it’s a Friday and we have a full day of trade ahead of us, we think there could be some downside potential. Remember, no one promised us a rose garden. As futures traders we are paid to react, not think. It may sound funny but get in, get out and don’t fall in love with any one idea or direction. You really do have to think like an algo. Our view, sell the early rallies and buy weakness down 20 from the close.
One last thing. We have a very special boot camp planned. It is the most inexpensive way to check out our product. You will see Tim from TopNotch, Stewart from ChicagoStock Trading, Willian ‘WB” Blount, Marlin and the MiM, Rob from Discovery trading, Robert Heffernan on commodities, Alan Palmer of Nasdog.com, the traders from the new MrTopStep Options forum, yours truly, and so much more!
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And always remember to use stops when trading futures and options…
- In Asia 8 out of 10 markets closed modestly lower : Shanghai Comp. +0.07%, Hang Seng -0.27%, Nikkei -0.19%
- In Europe 12 out of 12 markets are trading lower : CAC -0.85%, DAX -0.99%, FTSE -0.30% at 6:00 am CT
- Fair Value: S&P -10.58., NASDAQ -13.36 , Dow -106.31 –
- Total Volume: 2.26mil ESU and 5.3k SPU traded in the pit.
- Economic calendar : PPI-FD, Consumer Sentiment , Treasury Budget.
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