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The Story Of The Berserk Nat Gas Algo Just Got Really Strange
We have already posted two articles on the case of the berserk "fractal" nat gas algo which caused a mini swoon in Nymex gas (NG) prices last night, preceded by some very abnormal trading patterns (discussed here and here). However, per additional observations on what happened, courtesy of Nanex, this very odd case is about to take a very disturbing detour into the downright surreal. Per Nanex: "It's almost as if someone is executing a new algorithm that has it's buying/selling signals crossed." In other words, either an HFT firm has hired some intern to code their algorithms without having even the faintest understanding of finance and economics (possible but unlikely), or as we have long speculated, we have now officially entered a bizarro market... though much more than just sarcasm: this is now a market in which buy and sell signals are confirmed to have been flipped. Nanex' conclusion is spot on: "Most disturbing to us is the high volume violent sell off that affects not only the natural gas market, but all the other trading instruments affected by it." Translated: the entire market now trades on flipped signals.
From Nanex:
The following charts show trade, trade volume, and depth of book prices and relative sizes for the July 2011 Natural Gas futures trading on NYMEX. Depth of book data is color coded by color of the rainbow (ROYGBIV), with red representing high bid/ask size and violet representing low bid/ask size. In this way, we can easily see changes in size to the depth of the trading book for this contract.
Depth of book is 10 levels of bid prices and 10 levels of ask prices. The bid levels start with the best (highest) bid, and drop in price 10 levels. Ask levels start with the best (lowest) ask, and increase in price 10 levels. The different in price between levels is not always the same. It depends on traders submitting bids and offers. In other words, depth of book shows the 10 best bid prices, and 10 best ask prices.
In a normal market, prices move lower when the number of contracts at the top level bid are executed. The next highest bid level then becomes the top level, and the 3rd level becomes the second and so forth. A new level is then added below the previous lowest level. On our our depth charts display, you would see this behavior as a change in color of the top level bid from the red end of the spectrum towards the violet end.
On June 8, 2011, starting at 19:39 Eastern Time, trade prices began oscillating almost harmonically along with the depth of book. However, prices rose as bid were executed, and prices declined when offers were executed -- the exact opposite of a market based on supply and demand. Notice that when the prices go up, the color on the ask side remains mostly unchanged, but the color on the bid side goes from red to violet. When prices go down, the color on the bid side remains mostly unchanged, but the color on the ask side goes from red to violet. This is highly unusual.
Upon closer inspection, we find that price oscillates from low to high when trades are executing against the highest bid price level. After reaching a peak, prices then move down as trades execute against the highest ask price level. This is completely opposite of normal market behavior.
The amplitude (difference between the highest price and lowest price) of each oscillation slowly increases, until a final violent downward swing on high volume. There also appears to be 3 groups of these oscillations or perhaps two intervals separating these oscillations. It's almost as if someone is executing a new algorithm that has it's buying/selling signals crossed. Most disturbing to us is the high volume violent sell off that affects not only the natural gas market, but all the other trading instruments affected by it.
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The masses tend to be chaotic and unpredictable, like the weather.
Some things you think would cause a huge reaction and nothing, and other times a spontaneous wave of action.
The choices of the individual and of the mob are both easy to control and impossible to control.
Change to a corrupt system such as ours won't happen until individuals, who by design or much more likely by individual choice which becomes a wave, shatter the system.
Take the majority of private capital out of the markets and especially out of funds and pensions and give each cent a locus of control directly realated to the individual and you would see an unorganized storm that would destroy our casino markets.
I suspect that this is already happening in many ways, thus the need for so much POMO and QE and all the other "harmonic balancers" that are only delaying the inevitable.
Looks like pigs at the trough are starting to bump shoulders.
Dueling algo's? (cue the banjo...)
There hasn't been much in the way of logic or reason in the intraday movements of natural gas futures as long as I've been trading them. Put your helmet on and embrace the chaos!!!!!!!!!!!!!!!!!!!
Who uses/trades nat gas? Utilities right? The market is thinly traded because utilities buy in bulk on multi year contracts. And absolutely nobody but utilities and Monsanto, a few other big players in the Ag sector take delivery. The shit is so cheap the oil companies flame most of it off rather than try to transport it to markets. I somehow doubt that any serious money would go into inventing skynet in such a small market. OK, they might be using nat gas as a shakeout cruise but to what end? You can only take so much from the end payers (like me a consumer) in any commodity before you defeat yourself because I ran out of cash to buy or switched to wood for my heat.
One of the reasons we see this abnormal pattern in the nat gas trades is that it is so small. In a market that small almost anything can move it, and almost any errors can create patterns that look like we have cyber wars or ghosts in machines, this the problem with any technical analysis, any chart can be made to do or look any way you need it to through scaling. It is no coincidence that these odd looking graphs are in gas, and I am sure if you looked hard enough you could find such outliers in other thinly traded markets. Platinum for one, wool perhaps.
If you want to go all Carlos Casteneda or Timothy Leary, or Voldamort about it I am sure you can find the same or even stranger patterns in wheat or oil.
Try looking at this, please, just do me a favor for a moment...
Ordered Fear Plays a Strong Role in Market Chaos
ScienceDaily (June 8, 2011) — When the current financial crisis hit, the failure of traditional economic doctrines to provide any sort of early warning shocked not only financial experts worldwide, but also governments and the general public, and we all began to question the effectiveness and validity of those doctrines.
A research team based in Israel decided to investigate what went awry, searching for order in an apparently random system. They report their findings in the American Institute of Physics' journal AIP Advances.
The novelty of their study is the incorporation of time variation of "human factors" into mathematical analysis. The team, led by Dr. Yoash Shapira, former head of the Atomic Energy Commission Research and currently a guest scientist at Tel Aviv University, along with Eshel Ben-Jacob, a professor of physics, Tel Aviv University School of Physics and Astronomy, and his doctoral student Dror Y. Kenett, hypothesized that temporal order (arrangement of events in time) should be hidden in variables associated with fear, such as volatility.
They analyzed the volatility time series of 10 different stock markets from seven countries over a period of about 50 years and, rather than following traditional economic analyses, they analyzed time variations in the volatility -- or the "volatility of volatility," a.k.a. "fear volatility."
In all markets studied, analysis revealed the existence of hidden temporal order in the volatility and very high correlations between the volatility and the magnitude of price variations. This marks the first time hidden temporal order has been found in these market "human factors."
"To a non-economist, economic theories seem decoupled from human reality. The fundamental assumption is that investments are made rationally. But investors can behave irrationally -- driven largely by greed and fear, and other human factors," explains Ben-Jacob. "It's also odd that many mathematical analyses, such as the design of investment portfolios, assume no memory. It's assumed that stock prices behave with no apparent temporal order. Yet investors, including professional traders, take into account past behavior and are particularly influenced by the variation in prices or the volatility associated with the fear index."
The existence of such volatility order, or "ordered fear," implies that proper portfolio design should take into consideration the "volatility of volatility," according to the team. For example, the common approach to reducing risk is to select stocks with negative or low correlations in their sequence of returns. The new findings suggest that selection criteria should incorporate the correlations in the stocks' volatility dynamics.
"We're working on incorporating human factors into market analysis," Ben-Jacob says, "by constructing a new parameter to replace the traditional systemic risk parameter."
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You all might be right, and if you are I do not want to build a bunker and stock it with food that has a 40 year shelf life, I want to go and get the fuckers doing this and bring them sweet justice. I don't care if they are in Passaic or Pakistan, Minsk or Minneapolis. But I also think many of you need to look in the mirror and realize you have geek written all over your forehead and you NEED to take a break and chill, get back in touch with actual people, social cooperation you know?
This thread has had some amazing thought put into it. You are all great thinkers, together maybe it should be us who run the world, but I see a huge gap, lack of respect and cooperation. Not universally, mostly it works, but there are a few that just can't take constructive criticism. Hoarding silver and gold in order to preserve your wealth in a dying world is an act of cowardice and greed, no better than the fuckers that are bringing us the main floor show on CNBC and Bloomberg. They have the estates in the Hamptons, the yachts, the fast cars, the great food and wine, the preposterously siliconed babes, and when it all crashes down you will have the real wealth right? The babes and beach houses will be yours. UnHuh. What is the point? You were right so you win? Your housemaids will be malnourished and the great cars will look good in your garages but there will not be roads to drive them on. But oh yes, you won. Ever hear of a Pyrrhic victory?
Trust me, you need other people.
yep it's SkyNet
Pretty normal 'megaphone' pattern, described in the 1950's by Edwards & McGee in Technical Analysis of Stock Charts, which they advise usually resolves downward. Just happens faster, as does everything else in the internet age.
Next.
I regret not being able to understand these images, and would invest the time to do so if I ever had the intent of trading futures. I envy those of you who see the implications of such data when presented visually like this.
It's the New Normal: Down is Up, and Up is Down.
Great heat map on the NG flash crash - certainly helepd fuel a viscious short covering rally.
I enjoyed this story on it over at Traderscommunity.com
Winners and Loses in HFT Algo Manipulation - NYMEX Natural Gas Futures Record Volumehttp://www.traderscommunity.com/news.php?extend.34865