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Computer Cowboys Wrestle with Volatile Commodities & CurrenciesGary Dorsch For most of Wall Street’s history, trading in equities was fairly straightforward: buyers and sellers gathered on exchange floors and haggled until they struck a deal. Computerized trading of stocks didn’t arrive onto the Wall Street scene until the 1980’s. Computer guided “Program trading,” - defined by the NYSE as an order to buy or sell 15-stocks or more, valued at over $1-million total, was blamed for the “Black Monday” Crash of October 1987. Then, in 1998, the internet opened-up markets to anyone with a desktop computer, and a trading idea. Since then, computer trading programs have grown vastly more powerful and the algorithms that guide their trading vastly more sophisticated. As such, the average PC trader is no longer able to compete with Wall Street’s computers. Powerful algorithms, called “Algos,” in industry parlance, are executing millions of orders a second and scan dozens of public and private marketplaces simultaneously. Algorithms can spot trends in the global markets, evaluate and integrate the latest news releases, changing orders and strategies within milliseconds, before PC investors can blink. As the use of algorithms moves from hedge funds and Wall Street’s trading desks to mutual and pension-fund managers, these computer guided trades now account for roughly 60% to 70% of total US-equities trading volumes on the NYSE, Nasdaq, and electronic markets, known as Dark Pools. As a result, many banks and brokerage firms have been able to slash their trading desks’ staff in half, while more than doubling their equity trading volume. There’s a special class of algorithmic trading, called, “high-frequency trading” (HFT), in which computers buy and sell equities based on information that is received electronically, before human traders are capable of processing the information. High-frequency traders (HFT) operate in the shadows, often in quiet places located far from Wall Street, and trading stocks at warp speed. HF traders move millions of shares around in minutes, yet only seeking to profit by “scalping” a few pennies off each share. Over the past few years, high speed traders have deployed algorithms more widely, and have become bigger players in commodity futures, foreign currencies, international stocks, and exchange traded funds. According to the Chicago Mercantile Exchange, - roughly 35% of all commodity futures trades is now handled by high speed computerized traders. That figure is expected to reach 60% of commodities trading volumes in the years ahead. Computer Cowboys Invade Crude Oil Pits With so many moving parts in the global financial markets, moving at faster and faster speeds, it’s no wonder that commodity fund managers are increasingly turning to Algos. Today, HFT and computer-generated trades account for 35% of the volume in Nymex energy futures. Even longer-term Macro traders that hold positions for weeks or months are turning to Algos to collect and analyze a wide range of data, such as interest rates, employment numbers, purchasing managers’ statistics, Chinese oil imports, corporate earnings, global GDP figures, etc, at millisecond speeds. Algos can read and evaluate 175 economic indicators at any moment in time, before firing off a trade.
How can the average investor hope to outsmart an Algo trader? Fortunately, computerized trading is mostly used in scalping operations, providing massive liquidity to the markets, but isn’t altering the market’s longer term mega-trends. In fact, Algos appear to be utilizing traditional tools that have been used for decades, and are in sync with today’s “Financialization” of the commodity markets. That is to say, Algos are reinforcing the “inter-market” relationships between currencies, interest rates, global equity markets, and the commodities sector, - most notably, metals and crude oil. Such was the case over the past year, when the gyrations of the Euro-zone’s equity indexes, and the Euro’s exchange rate against the US$, were key drivers influencing the price of North Sea Brent crude oil. For example, since peaking in mid-March, the exchange traded fund for the Euro-Zone’s broad stock market index, (NYSE ticker: EZU), has fallen sharply, from as high as $32.50 /share to around $25 today. EZU has suffered a “double whammy,” including the Euro’s 10% slide against the US-dollar. Thus, EZU is a key Algo indicator for crude oil traders, since it tracks the Euro-zone equity markets, - a real time barometer of the market’s outlook for the Euro-zone’s economy, and is incorporates the Euro’s exchange rate. In turn, EZU’s slide to $25 per share, has weighed heavily on Brent’s tumble to below $100 per barrel. Two other key variables that should be analyzed, are (1) the amount of crude oil that’s supplied by Saudi Arabia and the OPEC cartel, and (2) the direction of the Euro versus the US$. Although its influence has waned over the past few decades, the Saudi royal family is still the chief central banker of the crude oil market, and is the swing producer of the OPEC cartel. Riyadh says it has 2.5-million barrels per day (bpd) of spare capacity that can be pumped into the market at a moment’s notice, to either cap prices or knock prices lower. It’s interesting to note, that the peak in the North Sea Brent crude oil market, at $127 per barrel, did coincide with a stern warning from Saudi Arabia’s oil chief, Ali al Naimi.
Writing a rare opinion piece in the Financial Times on March 28th, Naimi blasted “irrationally high oil prices,” saying there was no shortage of supply, and that Riyadh was ready to use its spare production capacity “to supply the oil market with any additional required volumes,” he warned. “Supply is not the problem, and it has not been a problem in the recent past. There is no rational reason why oil prices are continuing to remain at these high levels ($127 /barrel). I hope by speaking out on the issue that our intentions – and capabilities – are clear. We want to see reasonable crude oil prices. Saudi Arabia will do what it can to mitigate prices. The bottom line is that Saudi Arabia would like to see a lower price,” he warned. Earlier, Naimi identified $100 a barrel as an ideal price for producers and consumers. To make this happen, Saudi Arabia boosted its oil output over the next few months to a record 10.1-million bpd, and lifted OPEC’s combined oil output to 31.8-million bpd in April – or 1.8-million above OPEC’s stated quota, thus greasing the skids under North Sea Brent. On May 8th, Naimi first indicated that the Saudi kingdom was pumping 10-million bpd and was also storing 80-million barrels to meet any sudden disruption in supplies. “In addition to our spare capacity of 2.5-million barrels per day, we have on the ground, in tanks and in pipelines, about 80 million barrels of inventory. These are working inventory,” Naimi said. Following Naimi’s initial warning, on March 28th, the price of North Sea Brent tumbled $40 per barrel lower to $88 per barrel in June, before rebounding to around $100 today. Coinciding with crude oil’s slide to below $100, was a slide in the Euro’s value from as high as $1.34 in early March to as low as $1.2350 in late May. Traders reckon that Riyadh would try to put a floor under North Sea Brent at around $84 per barrel, which is the estimated “break-even” point, that’s necessary for Riyadh to finance is domestic spending programs. The Euro’s Sharp Slide against the US$ has been a thorn in the side of the commodity markets for the past 14-months. The Continuous Commodity Index, (CCI) measuring a basket of 17-equally weighted commodities, stumbled into bear market territory on June 20th, soon after the Federal Reserve balked at launching a third round of quantitative easing (QE-3). The CCI fell as much as -27% from last year’s high, when it skidded to the 500-level, its lowest since November 2010. In turn, the Euro’s slide from as high as $1.4850 in April ’11 to $1.2150 today, a drop of -18%, and was a major catalyst behind the CCI’s demise.
The Euro also fell to record lows against the Australian and New Zealand dollars, after the ECB lowered it repo lending rate to a record low of 0.75% on July 5th. Traders expect more ECB rate cuts and another injection of cheap, long-term loans (LTRO) for banks. The Euro also fell to a 3-½ year low against the British pound and a 10-year low against the Chinese yuan on July 9th. The People’s Bank of China (PBoC) lowered its 1-year loan rate within minutes of the ECB’s rate cut, but failed to stop the Euro’s slide versus the yuan. Europe is the world’s biggest buyer of goods and services, buying 31% of all global exports. However, with the Euro losing its purchasing power against most major currencies, European consumers could be forced to cutback on purchases of foreign imports. Unemployment in the Euro zone has reached a record high of 11.1% in May, - a full 1% higher than in April 2010, and is also denting consumer spending. The jobless rate is likely to climb higher in the coming months, as depression like conditions in the peripheral Euro-nations spreads to the core. Manufacturing in kingpin Germany, is already showing signs of stagnation. The Euro-zone’s record jobless rate is the result of the austerity measures imposed by Germany, the IMF and the troika upon the so-called Club-Med nations. These brutal measures are making the working class pay for balancing budget deficits, while crony politicians transfer taxpayer monies from state treasuries into the coffers of the European banking Oligarchs that are receiving a bailout. In Greece, value added taxes have been sharply raised, pensions have been slashed, and hundreds of thousands of workers have been laid off in both the public and private sectors. Similar austerity policies have been imposed in Spain, Portugal, and Ireland. To read the rest of this article, please click on the hyperlink located below: http://www.sirchartsalot.com/article.php?id=166 ### Jul 10, 2012 321gold Ltd |
