S&P futures hit by high level of algorithmic trading

 

The S&P futures[ESZ13] were hit by a high level of algorithmic trading yesterday as the ESZ13 swung wildly, running up- and downside stops all day.

Twenty years ago and long before it was fashionable to talk about the stops, the Pit Bull used to sing a song into the phone: “Take out the lows, take out the highs, take out the buy stops, take out the sell stops,” and that is pretty much how it works today.

Let’s face the facts: The computers have taken over the game and it’s never going back to the analog way it used to be. In today’s high-flying world of algorithmic trading, a trader has to get in and get out just like the machines.

Fed overload

This week we have 13 Fed governors speaking, Ben Bernanke speaking, the Fed minutes and just an overall overload of Fed speak. It should be interesting to see all the different options. During the National Economist Club annual dinner last night in Washington, D.C., the Federal Reserve chairman said, “The economy has made significant progress since the depths of the recession,” adding, “However, we are still far from where we would like to be, and, consequently, it may be some time before monetary policy returns to more normal settings.

He also said, “I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery.”

At 6:45 CT, while Chairman Bernanke was presumably having dessert, the ESZ13 was up 2.25 handles. With all the Fed speak floating around, it’s our guess the ups and down we have seen so far this week continue.

JP Morgan pays record (and relatively minor) settlement

The long arm of the law finally caught up with JP Morgan yesterday. After ripping off the government and the American people for its trading in mortgage-backed securities during the housing crisis, JP Morgan [JPM:NYSE] agreed to a record $13 billion settlement.

The fine is three times what BP paid the U.S. for its oil spill in the Gulf. I remember vividly how the markets first reacted in the beginning of the credit crisis and I remember the March 2009 lows. I remember when the hedge funds blew up at Bear Stearns and how the firm blew up. I remember when Lehman got its credit lines cut by all the major banks and brokerage firms around the world.

Most of all I will never forget how those traders at Goldman and JP Morgan made billions while millions of people in the US. lost their homes and retirement accounts.

Our view

The algos did run amok yesterday. After a few sell programs they did a few buy programs. This actually did go on all day. We suspect today will be more of the same.

Sure the S&P closed lower two days in a row. Big deal. It’s only 15 handles off its all-time contract high. We suspected that the ESZ would sell off a bit this week and we don’t think it’s over yet.

We leaned to weak in the first part of the week and firm later in the week. We were right: the boat got a little too full and now it needs to sell off a little and back and fill. The upside, however, is not over yet.