Wednesday, August 6, 2008

Oil, Computers, and Momentum Trading

We said in "How Models Caused the Credit Crisis"
In addition to big numbers and fast computers we are also into models* [ahem -ed].
So this kind of story gets our attention. Also, we like Ann Davis' writing on oil, a lot*. From MarketBeat:
Ann Davis has this report on an aspect of the selling in the crude market.

Christopher Peel, chief executive officer of London asset-management firm Blacksquare Capital LLP, which launched a new fund of commodities-focused hedge funds in June, says a big contributor to oil’s slide has been momentum trading by computer-driven commodity trading advisors.

Such traders move en masse in and out of commodity markets when prices hit certain thresholds. Sentiment on oil has turned bearish, and “the muscle at the moment is with the trend followers,” says Mr. Peel. Once such computer-driven traders all start to sell, that “by its nature, sucks in the discretionary managers” who also reach a point where they have to sell, if their portfolios have dropped so much that they need to cut their losses....MORE

*From "Oil: Commodities Regulator Under Fire":
Swaps, Swaps, Swaps!
In October 2007, the author of this piece, Ann Davis, had a story that knocked our socks off: "Where Has All The Oil Gone?"