The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

The HFT Algo-Computers Crash FX Markets

We have been long-time critics of high frequency trading (HFT), where high-speed computers can place 90,000 traders per second. This has developed into “algo-trading” where the computer’s programmed algorithms enter orders without any human intervention. They just act on market data and enter millions of orders as determined by the software.

The market crash of August 24, 2015, in which the DJI crashed 1089 points in minutes, is an example where apparently a number of computers placed massive sell orders on apparent similar algorithms. However, within an hour, prices were back to normal. Anyone who had ‘stop loss orders” in the market was hit hard. Many ETFs traded perhaps 50% lower than the prices of the stocks they held. It was a matter of total illiquidity.

The regulators should have cancelled those trades where stops were hit, and it was rumored they would. But they never did. Apparently, some very big players really made a big killing and didn’t want to give the profits back.

There have been other such market crashes. And crashes in individual stocks and other investments triggered by algo-computers occur almost daily.

But the regulators don’t say a thing. The reason is that 70%-80% of all stock orders are now from HFT. Without them, the exchanges might go out of existence. Why aren’t more people talking about this? We assume that the financial media has agreed not to discuss it.

The NASDAQ even bought a company in the field of “Media Releases,” Globenewswire. What does that business have to do with a stock exchange? Well, it comes in handy when you want to slant the news, and possibly destroy reputations of critics. We believe we are one of their targets. Of course, we have no concrete evidence of that.

Read the report below of the foreign exchange market crashes the last day of the year, from www.zerohedge.com. It may be of great interest to FX traders.

Dollar Flash Crashes On Last Trading Day Of 2016

Dec 29, 2016 10:14 PM   zerohedge,com

It is oddly appropriate that in a year everyone finally admitted markets are manipulated by central banks and broken by HFT algos, that on the last trading day of 2016, the dollar flash crashed with for no reason whatsoever.

Shortly after 6:30pm Eastern, the dollar plunged by 150 pips against the Euro, once 1.05 stops were taken out, with algos sending the EURUSD as high as 1.07 in a matter of seconds…

… while concurrently the Swiss Franc soared as much as 1.6% against the greenback, as the USDCHF tumbled from just over 1.025 to just above 1.0050 as the pair briefly flirted with parity.

What caused it? As there was no fundamental news, the answer is the same catalyst as the pound sterling flash crash: once EURUSD stops were taken out, algos all piled up on the same side of the trade and with virtually non existent market depth, it sent the world’s most actively traded currency pair soaring. Indeed, as FX traders in Asia, cited by Bloomberg said, the EUR/USD jump was partly driven by a surge of algo-buy orders after pair rose above 1.0500 in early session.

Others agreed: as Shigeki Yoshitoshi, head of Japan FX and commodities sales at Australia & New Zealand Bank said, it “seems to be no particular factor driving euro sharply higher in extremely thin volume” adding that “there wasn’t any particular news. Markets are extremely thin and perhaps position tuning occurred.”

So after the initial freak out, where are markets now? Well, according to Bloomberg, after the Euro was dealt as high as 1.07 on the EBS platform, though that price level has been dismissed by banks and clients according to Asia-based FX traders, the pair is slowly returning to its pre-freakout level. As Bloomberg adds, the post-mortem of the EURUSD spike already has “traders swapping stories of clients dealing away and banks shedding tears” especially those who were stopped out by a few good stop-busting algos.

And while funds were seen buying under 1.0500, when the pair hit 1.0540 one trader says he had to take the loss.

Finally, if any readers missed the move, fear not: with the world’s most actively traded market having become a farcical, flash crashing joke, it is only a matter of time before the next algo-driven freak out returns.


OUR PREDICITION:
someday, we may see the DJI down 2000 points in less than 30 minutes. The markets will recover as the automated computers reverse from selling to buying. But the individual investors who got trampled will incur huge losses.

And at the end of the day, the average investor who doesn’t watch the markets will be oblivious to what happened, and no one will lift a finger to stop such outrageous practices, much less those in charge in Washington.