The10 am algo club

About 70% of all the trading in the US stock markets is done by algorithms. For F/X and derivatives it goes up to 80%. One of the most widely used trading strategy is known as VWAP (Volume Weighted Average Price), which basically looks at periods during a trading day with high volume, and tries to execute large block orders at that time to benefit from the liquidity. If 30% of the trading volume occurs in the first 2 hours, the machine will try to execute 30% of its order during that time window. It does look like the 10-11 am is the window where algos are dumping stocks. You can see the pattern in the chart below. Around 10:40 am yesterday, a huge sell order hit major indices, but it has been happening during the month of November. The actual reasons behind the dump may be a combination of things: (1) a stronger than expected September labor report, despite the fact that the unemployment ticked up, which may allow the Fed to delay the rate cut decision at the December meeting. (2) NVDA results, which were impressive on the surface but trickier on the details, and (3) the unwinding of the Yen Carry Trade, on the back of a potential intervention by the government to support the yen. In an efficient market, it’s not possible to exploit inefficiencies consitently, which in this case may mean that investors will front run the algorithmic sale before the machine triggers its order. And in a twisted plot, it may be what the algorithm wants if it’s looking for liquidity to buy. We’ll see.

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Source: Bespoke investment group