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Strange Days June 8'th, 2011 - NatGas Algo

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In the following chart, trades and quotes are plotted sequentially as they occur. As such, no data is lost. Exchange's bid and ask prices are colored according to the legend on the left. Trades are colored in white.

Activity before the drop, prices only:

Activity before the drop, prices and size:

Activity after the drop, prices only:

Activity after the drop, prices and size:

Zoom in of the pattern:

The following charts show trade, trade volume, and depth of book prices and relative sizes for the July 2011 Natural Gas futures trading on NYMEX. Depth of book data is color coded by color of the rainbow (ROYGBIV), with red representing high bid/ask size and violet representing low bid/ask size. In this way, we can easily see changes in size to the depth of the trading book for this contract.

Depth of book is 10 levels of bid prices and 10 levels of ask prices. The bid levels start with the best (highest) bid, and drop in price 10 levels. Ask levels start with the best (lowest) ask, and increase in price 10 levels. The different in price between levels is not always the same. It depends on traders submitting bids and offers. In other words, depth of book shows the 10 best bid prices, and 10 best ask prices.

In a normal market, prices move lower when the number of contracts at the top level bid are executed. The next highest bid level then becomes the top level, and the 3rd level becomes the second and so forth. A new level is then added below the previous lowest level. On our our depth charts display, you would see this behavior as a change in color of the top level bid from the red end of the spectrum towards the violet end.

On June 8, 2011, starting at 19:39 Eastern Time, trade prices began oscillating almost harmonically along with the depth of book. However, prices rose as bid were executed, and prices declined when offers were executed -- the exact opposite of a market based on supply and demand. Notice that when the prices go up, the color on the ask side remains mostly unchanged, but the color on the bid side goes from red to violet. When prices go down, the color on the bid side remains mostly unchanged, but the color on the ask side goes from red to violet. This is highly unusual.

Upon closer inspection, we find that price oscillates from low to high when trades are executing against the highest bid price level. After reaching a peak, prices then move down as trades execute against the highest ask price level. This is completely opposite of normal market behavior.

The amplitude (difference between the highest price and lowest price) of each oscillation slowly increases, until a final violent downward swing on high volume. There also appears to be 3 groups of these oscillations or perhaps two intervals separating these oscillations. It's almost as if someone is executing a new algorithm that has it's buying/selling signals crossed. Most disturbing to us is the high volume violent sell off that affects not only the natural gas market, but all the other trading instruments related to it.


Publication Date: 06/08/2011

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