Reverse-Engineering Algorithmic Trading Activity
In this exclusive bonus segment following his appearance on MoneyTalk Live, Daniel Ghali, senior commodity strategist, TD Securities, speaks further with the host, Greg Bonell, to offer unique insight on algorithmic traders. He explains how systemic trend followers are now dominating speculative trading activity in commodities markets following an extinction-level event for traditional funds. Daniel also discusses forecasting the actions of the largest commodity trading advisors (CTAs) to better understand the flows behind underlying market trends. Paying attention and adapting to the strategies employed by CTAs can be invaluable when predicting what might be happening next.
Key Takeaways
- Three major developments driving global markets for the last decade include the proliferation of algorithmic trend-following strategies, risk-parity portfolios and dealer gamma hedging.
- Approximately 70% of transactions in futures markets are now driven by a machine; although about half are transacted by high-frequency traders, these contribute minimally to directional flows.
- The bulk of the remaining of machine transactions is driven by momentum-chasing CTA trend followers which can exacerbate market movements.
- Reverse engineering the positions held by the average CTA in order to estimate what assets are being bought or sold by this cohort on a given day.
- Market fundamentals can be a catalyst for a change in trend, but CTA trend follower activity now frequently contributes to overshooting price action. Recently, the run-up of oil prices was initiated by tightening oil supply from Saudi Arabia and Russia, but ultimately extended by CTA trend follower buying activity.
This episode was recorded on October 5, 2023. Watch the full episode featuring Daniel Ghali discussing commodities and the global economy on MoneyTalk Live.
Subscribing clients can access the Advanced CTA Position Tracker report on the TD Securities Market Alpha Portal