Gas traders say HFT's are banging the beehive

Trying to Find Something to Believe In!

Yet banging the beehive has been around a lot longer than high-frequency trading. In fact it used to be in the domain of floor traders that used to “seek and destroy” stops in a thin market. Obviously if you are a floor trader you are upset that you no longer are the destroyer and now are the hunted.

Yet all of that gamesmanship in the market does serve a valid economic purpose. It is called price discovery. If traders did not trade and move the market from time to time the market would have no value for the users or the producers of the commodity that have longer term price stability in mind. If the traders bid the market up and it falls back down then it is likely based on the move that prices are not supposed to be that high based on the current fundamentals and vice versa the other way around. Yet at times this gamesmanship leads to a large move that sheds light on what might be hidden fundamentals that can send an early warning signal to the buyers or sellers on the underlying market to take cover or take advantage of the underlying changing fundamentals they may save their business from economic ruin.

Besides the added liquidity from the high frequency traders should improve not detract from the markets true function of price discovery and giving the users of the economy an opportunity to hedge their risk that is always there, commodity market or not.

As far as speculators that are afraid of having their beehive banged by the report should not have to not trade the report but just to change your trading strategy.

If you believe that the high frequency traders are going to bang the market, anticipate the move and have them work in you favor and not against you. If you are position trading into a report you have to make sure that if you want to do it right then you have the type of risk capital and tolerance to ride out the wild one hour or one day move. Over the long run if you are right the one day move will not matter. If you can’t afford to ride then you can’t afford to position trade. Or you will have to bite the bullet get stopped out and get back in.

Or better yet use it to your advantage, on report day instead of picking a direction ahead of the report, look to fade the up or down move. If you look at the average moves on report days you should be able to sell on the pop and buy on the drop. Sometimes you should be able to sell close to the high of the reaction and buy near the low. The big swings if executed correctly could give you bigger profits then trying to ride out the bang beehive bang theory. And you should be able to get away with a reasonable stop loss. That way you will have the high frequency traders working for you as opposed to against you. So instead of complaining about the increased liquidity and inevitable improvements that computerized trading will make, you just may start thanking them for helping you make money in the market. Computerized high-frequency trading is not going to go away so you just have to learn to make it work for you not against you.

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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