A Look At The Algorithm Puzzle Piece

A higher U.S. Dollar and lower Ten-Year Treasury yields are keeping the price of Gold in place.

The new Fed Chairman Jerome Powell is releasing a report today at 11 am EST, ahead of his inaugural testimony before congress. This report will be closely scrutinized by the market as it is still in a nervous state regarding the possibility of a more aggressive
Fed interest rate policy.

Traders and their algorithm strategies are at the ready if any unexpected news is released at 11am.

A close look at the U.S. Dollar and the Ten-Year Bonds at 11 am is highly recommended.

If a quick move is seen to the upside in the dollar and the Ten-Year Bond, watch out below in both equities and the price of Gold.

Open Outcry Vs. Electronic Trading Systems and Program Algorithm Strategies

Sometimes I reminisce about the old days when there were floor brokers taking your Gold future contract orders. Many of us Gold Traders on various trading desks had the floor broker in one ear and the client in the other. The floor brokers referred to us as “the traders upstairs.” I have to be honest, I never really trusted those guys to get us an accurate fill, otherwise known as getting your trade executed without a lot of grief, especially in a fast market environment. We frequently changed floor brokers, because, at times, the client on the other side of the phone was not happy with the execution.

Then electronic trading emerged and slowly the open outcry broker was a thing of the past. Executions were better, the platforms created more transparency for the trader and clients and everyone seemed happy.

Now the electronic trading platforms have evolved into specific trader/programmer strategies, also known as algorithmic programs, where lightning-fast executions are executed following the traders’ instructions. These programs are totally news driven (As we saw this past Wednesday, when the January FED minutes were released) and can cause big, quick moves in the Bond market, Equity market and our markets too.

Wednesday’s wild ride had all the business T.V. reporters scrambling to find out what happened. No one was able to put their finger on the reason that the Ten-Year Treasury Yields went up 7 big figures and the Dow dropped 440 points in the last 90 minutes of trading.

It was strange because, as the T.V. reporters were reading the just-released minutes, the equity and precious markets were interpreting the report to reveal that the members had a less hawkish consensus regarding rate hikes, so strong buying emerged.

It took about 30-minutes before the market turned on a dime and the Ten-Year Yields came off the intraday lows and the Dollar rallied. Volumes in all markets picked up significantly and Bears were seen all over town. I’d say the price of gold faired the best, only dropping from $1,136 to $1,322, while bigger moves were seen in the Bond market and in the Dow.

As a trader and investor, I’m finding it more and more difficult to figure out the drivers in these markets. It seems that very violent swings in these markets are a function of the fact that ninety percent or more of the trades in a fast-market environment are electronic algorithm program executions. It’s almost like a feeding frenzy, once one or two of these programs kick in, it seems many more jump in and before you know it volatility takes over and we are off to the races.

I can tell you that algorithmic programs really don’t sit well with the average investor. These programs seem to execute strategies faster than anyone can decipher the news, giving the institutional algorithmic trader an advantage. It will take some time before the regulators will be able to figure out how to control these fast executing programs. Come to think of it, I wonder if they can.

In the meantime, I guess we will have to live with the new-found volatility. It will be a good exercise to put a strategy in place to protect your investments. Now more than ever it seems these wide swings in the market are something we can expect to experience from time to time.

Have a wonderful Friday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals for information and thought-provoking purposes only and does not purport to predict or forecast actual results. This editorial opinion is not to be construed as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein cannot be attributable to Dillon Gage. Reasonable people may disagree about the events discussed or opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. It is not a solicitation or advice to make any exchange in commodities, securities or other financial instruments. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisers with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.