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August 2011 Edito: A summer with strong volatility

We have had much calmer summer period in financial markets… No time for holiday this year. This summer will rhyme with volatility… or lack of liquidity – anyway these two are linked. By the time I am writing this, the United States have just lost their triple A and the Stock Exchanges that opened during the weekend had quite of a bumpy ride. It will probably be the same on Monday for the European markets which have already been severely weakened by the debt crisis. The only question left is how far the news was already anticipated and priced by the markets.

It is due to these crises that many market makers choose to disconnect their systems to avoid bankruptcy. Yes, yes, the very same market makers criticized a lot these days for being big players on High Frequency Trading area. In a highly directional and volatile market, these market makers can quickly go bankrupt because they accumulate “reverse” positions without getting the opportunity to realize their “roundtrip” by selling their positions previously accumulated. No, the market makers have no incentive to manipulate the market by creating trends, contrary to what we often read. They are paid to hold the market and thus market make a profit during the period of quiet range. Shifting the markets to resell their inventory at a good price yes, but they are certainly not interest in trending.

In short, having learned the hard lesson of the 2008 crisis when a lot of  such funds have gone bankrupt, the market makers who have not the obligation to quote (the true registered market makers must always quote whatever the market is), decide now to disconnect their systems in such periods. This situation strongly dries market liquidity and so amplifies volatility boosting the crisis.

The systematic traders based on “trend following” algorithms generally benefit this kind of time when the trend is clear and strong. Several customers have told us that they got very good results recently… and this is probably not finished. But in this holiday period, please be very careful with your systems if they work without continuous monitoring. It is better to disconnect your system for a few days with protected funds and a peace mind than risking all in these very volatile sessions.
It may also be the good time to add some new specialized algorithms in your portfolio specialized on market crash.  Algorithms that would be triggered only after clear indicators of market crash . A good exercise for your holiday....

Concerning Automated Trading, we also got some news. We added two robots in the store: EasyTrade and OCO Order.
EasyTrade allows both to trade in furtive mode (or not) in one click with an ergonomic interface. And in addition, it allows you to automate your manual trading based on trend lines and channels.
OCO Order allows you to create the orders of the same name on MT4, namely "One Cancel the Other": 2 limit orders are placed on either side of the price and when the first is triggered, the second is cancelled. This type of order is particularly suited to news trading.

Good holidays to all of you who are taking now now… and good trading to the others!

Nicolas Vitale
Trading Automatique and Automated Trading
Director of Alpha Novae

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