October 18, 2013 / 5:00 PM / 4 years ago

REFILE-U.S. data backlog a boon for computer-driven trading

* U.S. data dump could increase volatility algos thrive on

* Debt standoff, central bank cash has curbed price swings

* Lift in activity may be temporary, limited by year-end caution

By Emelia Sithole-Matarise and Anirban Nag

LONDON, Oct 18 (Reuters) - Some financial traders stand to profit from the end of the U.S. government shutdown as a backlog of economic data to be released in the coming week churns market price volatility to the benefit of their computer-driven models.

With the issue of about a dozen potentially market-moving indicators postponed during the 16-day closure of federal offices, the rush of overdue numbers may help offset a drop in trading volumes during the shutdown, which ended on Thursday.

However, the week’s opportunities are likely to be limited by caution ahead of year-end accounts and, longer term, many think the political wrangling in Washington means the Federal Reserve will maintain liquidity that has held down volatility.

Tuesday brings the employment report, delayed from Oct. 4. As well as data on the world’s biggest economy, European and Asian numbers during the week may cause sharp swings in stock, bond and currency prices as investors parse the figures.

That will benefit high-frequency, or “algo”, traders, whose algorithms rapidly pump out a large number of small computerised orders to exploit price moves.

“There may be some surprises as the market catches up to the data. This implies heightened volatility, which is good for many systematic strategies,” said Aaron Smith, managing director at hedge fund Pecora Capital, which specialises in such trading.

“Our reaction during October was to dramatically reduce exposure to our momentum systems as price action was compressed and the market adopted a ‘wait and see’ attitude.”

Also known as momentum trading, such computerised dealings at high speed can inject further choppiness into markets, which in turn helps high-frequency accounts generate profits.

Over the years, they have formed a sizeable portion of daily trades in the foreign exchange and stock markets. Boston-based research firm Aite Group estimates high-frequency trading accounts for about 40 percent of spot trading in currencies, up from 3 percent a decade ago.

In the U.S. equities markets last year, it accounted for 49 percent of volume, according to the TABB Group, another research firm. But that was down from a peak of 61 percent in 2009. In Europe it was 28 percent, down from 38 percent.

Lower market volatility in recent years explains some of the relative decline in computerised trading, which has also been subject to concern from regulators who fear machines could cause damagingly extreme price movements.


While the deluge of data will trigger short-term opportunities for algorithmic traders, it is unlikely to lead to a significant longer-term pick-up in activity given most seek to preserve accrued profits in the later part of the year.

Price swings may also be subdued by expectations that Washington’s debt wrangle has clouded the outlook for the U.S. economy and that the Fed will keep its monetary stimulus intact into 2014. In recent years, massive liquidity injections by the world’s major central banks have crushed volatility by driving asset prices across the board higher, or lower, in lock-step.

Volatility in the currency market has tumbled in recent days; one-month dollar/yen implied volatility, or vol - a gauge of how choppy a currency rate will be - hit a nine-month low on Friday.

Euro/dollar implied vols have also fallen to their lowest in a month, suggesting major currencies are likely to trade in a narrow range in the coming weeks.

While the one-week euro/dollar implied volatility has risen, it remains well below recent peaks.

The VIX index, known as the “fear gauge” for Wall Street, has fallen sharply from a four-month high of 21.34 on Oct. 9 to 13.38 on Thursday. A level above 20 indicates expectations that stocks would remain choppy and lose ground.

“Volumes are low anyway and algos are not trading much,” said Mankash Jain, head of FX and investment management at hedge fund Solo Capital. “November is a time for preservation, so it’s unlikely we will see them coming back in a big way.”

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