MARKETS : FLASH BOYS, FLASH CRASH, FLASH DANCE ?

History is made daily.

Monday’s Dow’s tumble marked its largest one-day point decline ever on an intraday basis 1,089 points in the first six minutes of trading. Yes, a 6 minute wipe out before rebounding to close the day down 588 points.

No coincidence that China stocks fell 9% earlier, the worst day on the Shanghai exchange since 2007.

The day after was no different, more history in the making, with the Dow dropping 205 points today in its biggest reversal since 2008.

Traders live for moments like these ! Because volatility is opportunity.

But these days, you sometimes got to wonder who are you up against ?

Because we also saw a flash crash in the AUDUSD so sharp that charts cannot even agree on a low-point.

Of course, no human hands would be capable of capturing anything in those moments with their feeble mouse clicks. “In something of a mini ‘flash crash’ the local currency dived US2c in the space of 10 minutes, before rebounding back near levels seen at the end of local trade on Monday.”

For all the reports out there giving us the 1,001 reasons for the market crash, many citing China this and FOMC that and oil and emerging markets, few would acknowledge that it was not the work of the human hand.

Months from now, we shall have another of these announcements like the one out of Australia back in May.

“…..Much of the trading reviewed to date was linked to position unwinds by automated trading accounts linked to risk management logic………………This lack of liquidity distorted the execution logic in the algorithms of some participant systems.”

MARKETS : FLASH BOYS, FLASH CRASH, FLASH DANCE ?

Well, so much for my acumen from 3 weeks ago to call for the USDJPY at 120.00 and it sure did not disappoint, along with EUR, CHF, SEK and Gold. It did make me happy for a short while because I turned long at 118.00 and got caught by that 10 minute flash crash hitting what I call that missionimpossible-stop-loss-level. 

 

MARKETS : FLASH BOYS, FLASH CRASH, FLASH DANCE ? 1

Not-so-smart-or-smug-afterall-me did some reflection on those wasted weeks and wondered how I could have been foxed again especially after I have written so much about this over the years e.g. The Market Philharmonic Orchestra Presents : Symphony Eur Carnage.

24 August saw the largest 1 day candle (open-close range) for the USDJPY in the past 5 years at 3.72 pts (122.13 and 118.41) and the second largest 1 day high-low candlestick at 5.95 pts (122.13 vs 116.18 low) with 6 May 2010 registering a 6.03 pt range. A definite outlier of a day to go down into history books.

 

MARKETS : FLASH BOYS, FLASH CRASH, FLASH DANCE ? 3

USDJPY trading ranges taken from past 5 years.

 

Crashes are not altogether unpredictable as one of our writers, who has gone into voluntary exile, had explained some time back  and we are mighty lucky that most truly talented mathematicians prefer to stay as mathematicians instead pursuing the trappings of wealth in markets and driving themselves half mad in the process when they realise that markets are often quite irrational afterall.

….the specific type of pattern that links all of these catastrophes is so called log periodic oscillations, neatly captured in a formula derived by Didier Sornette, which when applied to markets would represent the log of the price of the asset as it approaches a crash at some critical time (tc). In the months, or even years, leading to that critical time, prices would oscillate with diminishing amplitude and increasing frequency:

…Didier’s Formula

p(t) ≈ p(c) + A + B*((1-t/tc)^beta)*(1+C*cosine(w*ln(1-t/tc)+Phi))

…Didier Sornette studied the behaviour of a lattice of agents exhibiting imitative and herding behaviour with nonlinear feedback. Such systems in nature are often found to exhibit sudden phase transitions from one state to another, much like a tectonic rupture, catastrophic failure in a metal or crystal subjected to stress, in magnetic substances…or a stock market crash.https://tradehaven.net/dangerous-markets-and-didiers-formula/

Fresh from watching the video, The Imitation Game, last night that reminded me of painful Monday, that I have been out-foxed by the algos again, and that programmes are one step ahead of human thought with predictive algorithms to work out the probability of human actions and their biases.

Ordinary “charts also pose a danger in recent years to the technical trader as computer algorithm programs smell out the chart points to plot the demise of chart traders by triggering their stop losses…. Wondering has become a long term strategy that, at best, underperforms the mediocre automated trading robots that are so good at second guessing what the average trader is thinking….Yet the success of the robot is dependent on the number of flawed human traders out there and perhaps, lesser robots.https://tradehaven.net/random-thoughts-human-trading-biases/

An excellent Youtube documentary on the rise of the robots and demise of human traders : Floored  http://www.youtube.com/watch?v=tCcxr-fyF4Q

So Flash Boys led to the 24 Aug 2015 Black Monday’s Flash Crash.
Where shall we dance to from here ?Given that most positions are pretty cleaned out by now or in the process of being cleaned out, for FX, at least, as bond markets remain illiquid and some equity positions may be too big to exit, I would expect outcomes to be unexpected as we normalise back into the “log periodic oscillations” that would lead to the next herd trade. Like I said, I would not be putting my bets on the EUR or JPY for the next Live, Die and Repeat trade mainly because it is still early days yet for the USD (and the DXY Index) and we have come a long way in 5 years to change our habits and our biases and it is perhaps time to revisit the way we look at those charts.MARKETS : FLASH BOYS, FLASH CRASH, FLASH DANCE ? 4

I shall be signing up for the first Tradehaven Technical Analysis Seminar – The Charting Way of Life. I would welcome those interested to drop me a note at tradehaven13@gmail.com before we formally announce the details. And of course, for everyone interested, it will not be conducted by me!, for obvious reasons. I daresay it will be the key to the next era for the marketplace and knowing those graphs could, very well, save us a bit of heartache.

Good luck !