Yesterday was one of those days where the penny drops. Some days I like to think I’m smart, other days I try to get out of the ute with my seat belt on. Yesterday was one of those day where I realised the seat belt maybe should have been unclipped a little earlier.
It all became clearer while reading a paper on Algorithmic Trading.
So basically a computer program is setup to analyse data. This data can have any relation to the underlying product the programmer sees fit to analyse. So for instance it may analyse the difference between bids and offers and make selling or buying decisions as it sees fit, usually in smaller volume than a “human” based decision. It became clear when I realised that these trading programs can be set to analyse media as well, in other words they can gain market sentiment from something like a “tweet” from someone suggesting something. Now if that “tweet” was to gain traction and represent a lot of what was getting “tweeted” about the program would pick this up and start using it as evidence to trade.
So stay with me here. Just say there is no progress in a trade negotiation somewhere but a person on influence says there is, it may be a blatant lie, but all the same this response gains traction in the media and the algo picks this up and starts to buy a product. The buying triggers technical trade and it becomes a self for filling upturn with zero fundamental backing or proofing in anyway.
This basically sums up what has been happening to a large degree with the soybean futures market in the US recently, the whole on again off again pattern. I’ll just buckle this seat belt back up and be on my way.