The S&P 500 Futures and the Algorithmic Arcade

Charts, Our View, S&P 500, The Opening Print

ES 03-15 (5 Min)  2_3_2015


Long before the robots took over the trading floor and the pits, men and women used to jump up and down and bid and offer with their hands. Many people used to refer to the floor as a gigantic casino, but things have changed quite a bit over the last 25 to 30 years as automated systems of all types have taken over.

Robots and more robots

Today algorithmic and program trading make up 80% of the daily volume of the S&P and crude oil futures, but it’s not just those two markets. After the HFT players took over the NYSE and the 2- and 3-cent pickoffs they used to make got down to 0.10 cent, the robots moved to the CME’s menu of futures and options markets. Going into the end of 2014 and the first month of 2015, these robots have taken over the daily swings of the S&P. What used to be 10- to 18-handle ranges have turned into 30- to 50-handle ranges and it doesn’t matter what day of the week it is.

Yesterday it was a 25-handle selloff, a 30-handle rally, another drop of 20, then 33 handles up to close at 2017. It was a 43-point difference between high and low. Those were the big moves and do not include all the 2- to 5-handle moves  in between. This is not like what we used to call erratic markets. 2015 has seen a big jump in volume and algorithmic trading. It really feels like there are a lot more robots operating in the ES and CL.

New World Trading Order

The robots are dictating the swings and have been for a long time. In the past when I did the UBS program trading business in the S&Ps, I saw that only a certain number of index arb buy and sell programs could be done until the “pipe” got too full.

That meant that if we were doing sell programs and bidding the S&P to buy the futures and then sell the cash as a discount to the futures, after four or five sell programs everyone would start bidding, and once that happened I knew the S&P was going to short cover. It would work 80% of the time, but like everything in the new world trading order it too has been run over by bigger and faster types of programs.

Personally I think the news algos that pay the big news services to help them jump in front of a news release are the ones that take the most advantage of the day trader / retail customer. Reuters, for example, is not only a news organization, they also are in the business of developing news-based trading algorithms. Do you think they stand to gain by coordinating the timing of algos and headlines?

At yesterday’s lows you could see the volume dry up on the low ticks. Once a few buy imbalances popped up and the market began to trade sideways, the programs started pushing the weak shorts out. Not long afterward, the index arbitrage buy programs were helping push the futures back up to unchanged and all the way up to 2018.50 just before the close.

At the end of the day I can only say that once the algos sense the S&P is oversold and the ES starts to short cover and the mutual fund buyers show back up, a rally becomes a foregone conclusion. The buy stops and buy programs just grease the wheels for the big investment and mutual funds.

In Asia 6 of 11 markets closed lower. In Europe this morning 12 of 12 European markets are trading higher. Today’s economic and earnings calendar starts with the motor vehicle sales, Gallup US ECI, James Bullard speaks, factory orders, 4- and 52-week T-bill auction, Narayana Kocherlakota speaks and earnings from Aetna (NYSE: AET), United Parcel Service (NYSE: UPS), Disney (NYSE: DIS), and Archer-Daniels-Midland  (NYSE: ADM).

Our View: How many days has the ES moved 30 to 50 handles in one day so far this year? Generally I am all over this type of price action, but when it becomes so extreme I think the risk of a wider drop becomes more likely. Yesterday the ESH15 made a lower low and bounced but closed out the day 28.50 points higher.

Last year January was down hard, bottomed on Feb 3, and then went on to a strong rally into the summer. As big a bull as I usually am, my gut says this big move stuff isn’t over. With the 2 and 3 percent moves going on in the VIX, I just don’t get the feeling this thrashing is over.

“S&P 500 Futures and the Algorithmic Arcade”

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 6 of 11 markets closed lower: Shanghai Comp. +2.45%, Hang Seng +0.29%, Nikkei -1.27%
  • Earlier in Europe 12 of 12 markets were trading higher: DAX +1.16%, FTSE +1.15%, MICEX +1.89%, Athens GD.AT +8.77%
  • Fair value: S&P -6.49 , Nasdaq -7.85 , Dow -74.62
  • Total volume: 2mil ESH and 7.4k SPH traded
  • Economic schedule: Motor vehicle sales, Gallup US ECI, James Bullard speaks, factory orders, 4- and 52-week T-bill auction, Narayana Kocherlakota speaks and earnings from Aetna (NYSE: AET), United Parcel Service (NYSE: UPS), Disney (NYSE: DIS), and Archer-Daniels-Midland (NYSE: ADM)
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