Market Matters Blog

"A Day in the Life"

Imagine ... This past Sunday (October 9) would have been John Lennon's 76th birthday. I mentioned this on Twitter, and an initial response was, "Yoko would have nagged him to death long before this." Well, I just had to laugh.

It's actually another of Lennon's songs, "A Day in the Life," I thought of over the weekend. Yes, I know it's a Beatles' song credited to Lennon-McCartney, but Sir Paul's contribution could be edited out and the song made better. Anyway, The Guardian (a British daily newspaper) had a Friday story on the flash-crash seen in the British pound earlier in the day (http://tinyurl.com/…).

The piece discussed a number of theories that had initially been thought to have caused the meltdown, a loss of 8% in eight minutes. First the chaos was pinned on someone entering wrong trade numbers in electronically. This would have triggered additional selling as stops were hit, and low volume (it was just after midnight in London as Asian market just opened), meaning few buy orders in the market to slow the fall.

Next, the fall was blamed on the expiration of foreign exchange options, again with additional stop-orders in place to sell if the market fell too far. As above, low volume would certainly have played a role in this scenario.

Late that Friday, though, attention seemed to center on an all-too-familiar idea: Computer-driven algorithmic systems based on headlines reacted to bearish Brexit news. This triggered massive computer selling, again with low volume trade creating what I call a vacuum in the market where few to no buy orders existed. So the pound falls, triggering more computer selling, and a flash-crash happens. The end result, as one Twitter friend pointed out to me Friday morning, is those in the market wake up broke with no idea what just happened.

I'd like to say this is an anomaly, but we've seen it play out time and time again in a number of market sectors. Do you want to make crude oil rally? Have a major media source release a headline to the effect of "OPEC Agrees Production Cuts Would Improve Price". Note that there is nothing about an actual agreement occurring, just the idea that such an agreement would be price friendly. That's common sense to us humans, but computers read the headline differently.

That's why DTN, as a major media source in agriculture, takes its headlines seriously. There is a great deal of responsibility these days in wording headlines so readers are interested in reading more, but also that the headline accurately describes the story in general.

Keep this in mind Wednesday following the release of USDA's monthly Crop Production and Supply and Demand stories. USDA reports are a feast of headlines for Watson (my name for computerized algorithm trade), leading to mini flash-crashes (or the occasional flash-spike). You'll quickly be able to differentiate the headlines aimed at providing information versus those targeted toward Watson.

As for the song, given the news in The Guardian, I couldn't help but think of this scenario with Lennon's opening line:

Watson: I read the news today.

The rest of us: Oh boy ...

Darin Newsom can be reached at darin.newsom@dtn.com

To track hisy thoughts on the markets throughout the day, follow him on Twitter @DarinNewsom.

(ES/SK)

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