Trader: ‘Algos And Dark Pools’ Are Making It Impossible To Know ‘What’s Going On’

Former FX trader Richard Breslow has a good piece out on Tuesday.

It’s particularly apt given what we saw in FX markets overnight between the RBA minutes, the Riksbank minutes, soft UK inflation data, and of course, the death of the GOP healthcare bill in the US.

All of this would be impossible to trade under “normal” circumstances, but modern markets make it even more fruitless. “Never has it been more obvious that relying solely on electronic trading has fundamentally altered how business is cleared,” Breslow writes, adding that “algorithms and dark pools make it increasingly difficult to follow what’s going on.”

Of course the other thing that makes it “increasingly difficult to follow what’s going on,” is the fact that in the final analysis, this is all one giant trade on DM central bank accommodation.

What you see in markets is a real-time referendum on what the next move will be, and the task is to look out across assets and synthesize what you’re seeing into some kind of coherent whole.

Again, that’s made more difficult by the fact that some of the participants in this real-time referendum aren’t carbon-based. More below…

Via Bloomberg

This has been a real toughie. The global economy is undoubtedly doing better. But we keep getting numbers that disappoint. There’s a cabal of central banks committed to raising rates the world over. Except for those days when it’s obvious that continued and open-ended support is vital insurance in these uncertain times. OPEC matters unless you take the view that they’re impotent. And of course how can one not vacillate between thinking politics and the legislative process is just plain incompetent or actively malignant. Now gin up some conviction and get out there and trade.

  • To make matters even murkier, we’ve been swinging between horrendously low volume days and times of inexplicable high interest. Poor liquidity conditions and massive block trading. Never has it been more obvious that relying solely on electronic trading has fundamentally altered how business is cleared. But algorithms and dark pools make it increasingly difficult to follow what’s going on
  • In this environment it has, counter- intuitively, almost become a liability to try to synthesize in any real-time fashion why a move just happened. The price action has to speak for itself and only after the fact is it worth putting a reason on it. As an experiment, pull an all-nighter tonight and you’ll be amazed to watch how commentators struggle with portraying the events as they happen. And it’s not their fault
  • Markets are gyrating back and forth. Just not on standard trading fare. Enormously important issues like U.S. health care and Brexit remain in constant flux, being played out in the open. We’re getting schooled in how the sausage is actually made. We’ve somehow taken really big, long-term issues and reduced them to the level of trading fodder. Which has rendered the items we used to focus on for short-term activity more or less pointless
  • As a result, it’s become vital to screen out the noise from formerly A- and B-list information that have become unplayable, largely irrelevant, blips. They’ve lost their power to sustain narratives
  • It’s one of the reasons that the most short-term technicals in your arsenal haven’t been all that helpful. It’s one thing to remain disciplined. It’s another thing to just keep getting stopped out in faster and faster time frames
  • You need to switch to medium-term gauges which have proven to be much more reflective of where true support and resistance lie. Who doesn’t love the 21-day moving average? Well, you would be better served cozying up to its big sister, 55, in order to recreate the old magic. Bigger issues demand more formidable measures
  • The interesting thing, is this seems to be true across asset classes and regions. Take a look, it’s an eye-opener and just might spare you some frustration
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