On March 8 2012 we referenced data showing liquidity drying up a minute before the MBA Purchase Applications number.

Since then, we have been tracking patterns in liqudity drying up in the eMini:

• 10-Mar-2012 ~ eMini Depth of Book Recovery?
• 10-Mar-2012 ~ eMini Depth 8:30am news
• 23-Mar-2012 ~ eMini Depth at 10am
• 01-Apr-2012 ~ eMini Depth 10am
• 24-Apr-2012 ~ eMini Depth
• 01-May-2012 ~ eMini Depth 10am
• 04-May-2012 ~ eMini Depth 8:30am
• 09-May-2012 ~ eMini Depth of Book
• 17-May-2012 ~ eMini Depth of Book 8:30am
• 17-May-2012 ~ eMini Depth of Book 10am
• 24-May-2012 ~ eMini Depth of Book 8:30am
• 29-May-2012 ~ eMini Depth of Book 10am
• 01-Jun-2012 ~ eMini Depth of Book 8:30am
• 20-Jun-2012 ~ eMini Depth of Book oddity

Today we present more evidence showing the same behavior based on the major announcements on Thursday July 5th and Friday July 6th of 2012.

*Image Courtesy of: Econoday's 2012 Economic Calendar

The following images show CME's eMini future (S&P 500) depth of book and trades paired with one second bar charts showing price movements over roughly the same time period. The DepthMap images are rainbow (ROYGBIV) color-coded by the relative size at each depth level. Red indicates a lot of size, violet indicates size approaching 0. Note that a full minute before each event, the depth starts cooling rapidly. The volume of contracts traded is represented at the bottom of the chart.

This event is caused by the release of the MBA Purchase Applications number at 7:00am. Notice the spike in volume and depth at 6:59:58. While the few minutes leading up to 7 the volume starts to dry up (blue).

Here is a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment).

Lastly, if you check out the highlighted section above. You will notice a distinct "square wave" pattern. Indicative of algo based trading. The two minutes prior to the announcement is "business as usual" for the algos.

7:46am

Surprise! Organic Liquidity Dryup. If you check official announcement list, the next official announcement was at 7:30am. This news passed without fanfare, but something else interesting happened on the way to 8:15...

Edit: Some further research indicates that it might have been caused by this announcement: President Mario Draghi discussed the ongoing threats to the Eurozone economy

This liquidity dryup wasn't "planned" but you can see a similar pattern emerge... organically. HFT and Machine Learning algos like predictable patterns. They would rather make pennies (or fractions of a penny) in a sure bet, than deal with trying to predict and be on the right side of a large price swing. This image shows this type of behavior outside of a major announcement. You can see at about 7:45 "something" in the market starts exiting as the DepthMap starts to cool down. Then sure enough, a little before 7:46 there is sharp drop and then rise in price. The smart algos detected higher volatility and sat on the sidelines until things cooled down a bit until they could get back in on the "sure bet".

Here is a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment).

8:15am

This event is caused by the release of the ADP Employment Report number at 8:15am. The section to pay attention to in this image is the Size Map. The depth of book drops to basically ZERO in the minute leading up to the reports. And then at 8:15am the price shoots way up on high volume when the bots, after having officially read the news coming across the wire get back in full tilt.

Here a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment).

8:30am

This event is caused by the release of the Jobless Claims number at 8:30am. Notice that the algos dried up (as expected) pre-8:30, then when there wasn't any earth shaking news, both the price and volume stayed relatively flat. At this point, the day's news had already been "priced in" but the algos still pulled out in the crucial minute before the announcement "just in case".

Here a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment). Note the price stays relatively flat.

10:00am

This event is caused by the release of the ISM Non-Mfg Index number at 10:00am. Notice that the algos dried up (as expected) pre 8:30, then when there wasn't any earth shaking news, both the price and volume stayed relatively flat. At this point, the day's news had already been "priced in" but the algos still pulled out (although less than the crucial minute before the announcement "just in case".

Here is a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment). Note the price stays relatively flat through the 10:00am time period.

July 6, 2012:

8:30am

This event is caused by the release of the Employment Situation number at 8:30am. Notice that the high end bots start getting out en-mass long before the official announcement. A full two minutes before the announcement algos are running for the sidelines as fast as their little AI brains can take them. By the time 8:30ET rolls around, anyone still in the eMini is going to get slaughtered by the volume in the first few seconds after the announcement. After about two minutes at 8:32ET, it's business as usual and the eMini goes into it's "fire-hose mode" of huge depth on both sides of the book (solid red with a big fat Size Map).

Here is a one second bar chart over roughly the same time period (both charts have auto-sizing so they are slightly out of alignment).

Lastly, if you check out the highlighted section above. You will notice a distict "square wave" pattern. Indicative of algo based trading. Humans beware! The two minutes prior to the announcement is "business as usual" for the algos.

Conclusion: HFT traders and AI bots/algos DO in fact provide liquidity... but only when it's to their advantage. The AI algorithms thrive on speed and like the Christmas Tree Worm that fans its tenticles and sucks nutrients out of passing microscopic sea life, they are quick to retract from the market if any whiff of danger (losing money) is detected.