The news wires were all abuzz over the past session and a half as the CFTC claimed to have the culprit in the 2010 flash crash narrowed down to one trader and his "spoofing" techniques. This is a practice of attempting to influence the price discovery of a given market by putting in large one sided orders without ever having the intent of trading those contracts.
It has, unfortunately, been a widely used practice since the advent of algorithmic trading. Whether you believe this single trader to have caused the flash crash or not it does highlight the much larger concern in the markets; liquidity. High Frequency Trading, Algos, and proximity (ultra low latency) trading has removed one of the most important cogs in the working of open markets price discovery, the market maker. This becomes important when volatility is spiking as there are less and less participants willing to take the other side of a tending trade, even for a reasonable discount.
Furthermore, Reuters published a piece this morning explaining another reason for the liquidity crisis: "Banks` exodus from commodities and tighter capital requirements for financial institutions are squeezing liquidity from some markets, leaving them vulnerable to big price moves, major trading houses say."
This is particularly important when looking at the energy markets due to their already volatile nature and does help to explain why the markets seems to go significantly farther when trending than one would anticipate when comparing to previous similar moves. Being aware of these facts is half the battle when constructing a trade plan for today`s markets rather than one that may have been more effective some years ago.
For now the energy markets are stuck in a relatively tight range which can tend to lull some to sleep and potentially trick traders into taking risks that are maybe not especially wise for these markets. As these markets "coil" up with lower highs and higher lows they are developing a breakout likelihood one way or the other. The fundamentals should divine the direction of the breakout but until then using limited liability trades is certainly more advisable.
Yesterday we saw mixed data from the supply side through the Energy Information Administration (EIA) release giving little indication of direction in the market. We continue to monitor economic data for indications on the demand for energy commodities increasing or decreasing. Pundits are currently looking for demand to gradually continue on the rise into 2016 steadying the price of energies going forward, should there be no radical changes in other fundamentals.
The natural gas inventories are due out today as well. Natural gas is in the same scenario with tightening price discovery near the recent lows as the market looks to either continue its trend lower or reverse in a corrective rally. Demand is suspect this time of year as it can be too cold for AC and to hot for the furnace, though these seasonal issues should be priced in to the market already. Look to the supply side for this breakout in natural gas. Should we start to see the corrective rally gain a foot hold, then the gap in pricing up at 3.26 would almost certainly be a target.