There was some pretty interesting commentary in this weekend’s Barrons with regards to the algo trading in S&P futures. As I’ve discussed in the past, the odd action has been blatant and inexplicable. Apparently I am not the only one noticing. Barrons writes:
“The suspect algorithms first appeared March 2, Eric Hunsader, founder of Nanex, a Winnetka, Ill., data firm, tells Barron’s. When rapid-fire automated-trading systems torched the indexes in the infamous May 6, 2010, “flash crash,” Hunsader was the first to notice that the Consolidated Quote System (CQS) was running 35 seconds late.
Hunsader’s Nanex delivers trade data from multiple markets over the Internet to retail and institutional clients. When the New York Stock Exchange discovered gaps its trading data for May 7, 2010, it purchased Nanex data from a third-party vendor to fill in the blanks. The data are sold to institutions for back-testing.
Automated systems are programmed by mathematicians whose ultra-short-term strategies have radically altered markets. And while there have been flash-crash fixes, they haven’t stopped the new invaders, which are orders of magnitude faster.
Hunsader theorizes that one new algorithm appears to be trading E-mini S&P 500 Futures (they’re a fraction the size of standard S&P futures contracts) at the Chicago Mercantile Exchange. The algo alters the prices of related instruments, like index-based the SPDR S&P 500 (SPY) exchange-traded fund and underlying Standard & Poor’s 500 stocks and options — creating arbitrage opportunities; when it’s active, the bid-ask spread on SPY as traded on Nasdaq’s Philadelphia exchange sometimes widens from a penny to a dollar. The spreads on the SPY stay within a penny on other exchanges.”
I am not sure if this is related to the bizarre action I have noticed in the e-mini futures, but there’s certainly something odd going on here….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.