Early on here Sunday night, we have had a 7 cent trading range in Jan Beans, spurred mostly from one short covering order. On the screen 400 contracts traded at the high so far at 1001, with a low at 993, 7 cents below that high. The trade volume is posted next to each price on the screen, so obviously, the computer matched up all the buys and sells early on at 1001, and then there was a vacuum for 7 cents…
I have written in the past that this is the bane of electronic trading. Say what you want about open outcry, it worked well as price discovery and risk transfer mechanism for over 150 years. And a 400 lot would not have made any bean market jump 7 cents…There simply was more liquidity.
This is a function of the physical differences between a human being and a micro-processor…A micro processor in infinitely more rapid in trade execution, but it also is infinitely more volatile than a group of human traders ever could have been.
If human brokers in the open outcry system had filled orders the way the screen does via the auto spreader, no one would have given that broker a tight market. Hence the market volatility we see today.
Increased unforeseeable volatility is now and will always be a function of the mechanism of computerized trading.
The difference is, time was where a broker could fill a 2000 lot within one cent. Now a 200 lot makes us move a nickle.
I can remember customers complaining about getting a price a quarter cent higher on their buys or a quarter cent lower on their sells, and demanding adjustment checks from the filling broker because the customer felt he was owed that quarter cent.
Now, that same customer gets to have his order filled within a nickle, or in other words, 20 times worse than he would have with the open outcry system.
The other complaint was that customers had to wait for their fills, to know exactly where they were filled. On an opening with a 3 cent range, you could let them have a worse case fill, and then if in deed they got a better fill, they were happy. They might have had to wait to get the exact price, but it arguable was a better price.
Now if they throw an order on the opening as a market order, there is a good chance they will see a ten cent opening range, or 3 times what it was under open outcry… all in exchange for ‘instantaneous’ fills.
So all those customers who used to complain about having to wait for a definite fill, all I can say is, be careful what you wish(ed) for.. Now you have it and you have the resulting trade, where the market once had an ebb and flow, now its like watching leaves flutter on a tree in a hurricane. But you have your fill… instantaneously.