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Tuesday, August 9, 2011

8/9/2011 - An algorithim running backwards in natural gas

The folks at Nanex — the group which successfully data-mined the consolidated trade tape from the May 6, 2010 to determine the role played by algorithmic trading in the flash crash — have cast their eyes over to the natural gas futures market andWednesday’s mini flash crash.
In their opinion, “a close-up” of the trading patterns on the day shows  “something very wrong” in the market.
As Eric Scott Hunsader explained to FT Alphaville (our emphasis):
If I had to make a guess, I would say this looks very much like an algorithm running backwards. You see, prices normally rise when someone keeps buying at the ask price — the ask price moves higher, more buying there, then higher. However in this case, it goes up because the “bid” increases when someone sells at the bid!
As an example, let’s say I wanted to sell a lot of gold. The price is bid 100, offer 110. Not wanting to push the market down by trying to sell at once, I sell a little at 100. Much to my surprise, the bid then moves up to $101, and the offer to $111. Great! I sell more at $101. Now the bid moves up again! ? Huh? I sell more and each time the bid goes higher!
These sorts of oscillations — as revealed in the charts below – are truly odd, he concludes.
You can see more of their charts here.
Olivier Jakob at Petromatrix, meanwhile, observes this about the flash crash and the Nanex charts:
It’s beautiful as a piece of art but frightening. Meanwhile there is a lot of Interest going into US Natural Gas. The Open Interest in NYMEX Natural Gas crossed the 1 myn mark and is very close to the record level.
Incidentally, we contacted Nanex at the time of the standard-deviation busting movein oil and silver to see if it too may have featured an algorithmic footprint. Nanex, however, were unconvinced that those particular moves in the market were being caused by computers run wild.

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