Oil Crash Pits Floor Veterans vs Computer Algos

A day after oil prices plunged an unprecedented $12 a barrel, a New York trader sat on the steps of the dormant oil futures pit, playing a word game on his tablet computer.

Back to business as usual for floor traders, a vanishing breed in a market now dominated by machines and algorithms, a fact that some of them say worsened one of the most shocking — and baffling — trading sessions ever.

On the waterfront of Manhattan’s southern tip, veterans of the New York Mercantile Exchange’s (NYMEX) pits recounted how the crash reminded them of the heyday of the trading floor.

“Yesterday was organized chaos down on the floor, it was right back to the old days,” said Chris Kenny, crude oil options trader at Lloyd Group. “The size of the move was almost unprecedented and you could see it all there. Greed and fear, that’s what this job is all about.”

Action in the options pit was still lively, they said, reminding them of the jostling and jousting of days gone by.

Miles away from the emotional rollercoaster that marked Thursday’s puzzling rout, the new breed of computer traders counted their profits in anonymous offices across the country.

High-frequency and algorithmic traders, comprising half the oil market, seem to have weathered Thursday’s mayhem without breaking a sweat, unlike many of the new breed who took a beating in the stock market “flash crash” exactly a year ago.

“We continued to trade normally and be involved in the market the whole time, no differently than the day before. We didn’t change our risk parameters or our model parameters,” an oil futures trader at an proprietary algorithmic trading firm told Reuters.

Unlike with the stock market’s “flash crash,” few old-school traders blamed the algos for the fall, although some did blame them for the end of a way of life that aided both transparency and liquidity in an often opaque market.

“When you get massive electronic long-liquidation like that the price just moves rapidly. It wouldn’t have been the same on the floor,” said Bob Penny, an individual trader of crude oil and sugar who has been in the business for 31 years. “You didn’t get price vacuums there. Funds don’t try and finesse it — when they decide to sell they just hit it.”

While conventional wisdom would have suggested buying on the dips in such a seemingly illogical and abrupt decline, computer programs said otherwise as the fall continued.

“If you’d followed conventional wisdom… you would have got killed,” said Jeffrey Grossman, President of BRG Brokerage.

Analysts at investment bank Credit Suisse said automated trading probably did play a role in the fall.

“We believe the magnitude of the correction appears in large part to have been exacerbated by algorithmic traders unwinding positioning.”

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