CME Group Inc (NASDAQ:CME) halted gold trading on the COMEX exchange Thursday morning because of excessive price volatility, as reported by Matt Day for The Wall Street Journal.
CME Group’s automated program
CME Group Inc (NASDAQ:CME) uses a program called Stop Logic that pauses automated trading for up to 20 seconds depending on market conditions. Stop Logic halted orders in December, for delivery gold futures at 2:54 a.m. Eastern time for the full 20 second period, CME’s spokesperson said.
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
The program was triggered when futures prices climbed toward $1,350 an ounce, setting off a large number of sell orders which then dropped the price by about $10 an ounce within a minute.
Gold prices dropping
Overall, gold has been dropping, recently hitting a four-week low. The U.S. continues to deliver strong economic data, and the Fed is expected to begin tapering in the near future. Gold prices had been bolstered by uncertainty around Syria, but a developing diplomatic solution has reduced expectations of a U.S. air strike.
Despite weak conditions overall, the $10 per ounce drop probably had less to do with fundamentals and more to do with algo trading. A large number of investors (or investors’ algorithms) set the same sale price and triggered at the same time. If the drop had been allowed to continue, there is the possibility that downward momentum would trigger a different set of automated sells, causing a cascade and an artificial crash.
Safety valve for markets
Looked at this way, the momentary halt in gold trading can be seen as a success. Stop Logic is meant to act as a safety valve that gives markets time to react to sudden spikes in a more rational way to prevent exactly that sort of cascade from occurring, and it seems to have worked.
Trading has become increasingly reliant on complicated algorithms, and the stability of trading platforms can no longer be taken for granted. When NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) went offline in August, it surprised a lot of people who took their access to markets for granted. While NASDAQ trade volume hasn’t suffered from the glitch, exchanges should be pleased when the security protocols they put in place work as intended, shoring up confidence in their platform.