How Are Algorithms Anticipating the Fed Decision?

Algorithms are fired up to hang on Jay Powell's every word.
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More than just people will be listening into Jerome Powell's decision on Wednesday.

Federal Reserve decisions in recent months have drawn a great deal of interest, as each tightening decision under Powell has added to anxiety in a market rife with volatility. 

Many human traders are simply stepping back as it appears that any decision at all by the Federal Reserve will spike short term volatility even further.

As such, much of the day's trading might be run through machines.

"Our research indicates that historically people tend to reduce exposure prior to FOMC meetings because they don't want to deal with the uncertainty," Petra Bakosova, Chief Operating Officer at Hull Tactical told TheStreet in an interview. "There's a substantial drift."

She explained that the market gap will be filled by a variety of algorithms that are not anxious about any volatility.

"On the shorter term, it will be a combination of different algorithms," Bakosova explained. "They'll have algorithms parsing the headlines, whatever the announcement is and then typically you'll see the market get out of line and people will have some kind of mean reversion going on. It's going to be a display of every type of algorithmic trading out there."

Ahead of the announcement, President Trump has offered more material for algorithms to parse.

The Commander in Chief implored Powell to rethink his proposed quantitative tightening plan that would allow $50 billion of its Treasury and mortgage backed securities holdings to mature each month without replacing them.

"Don't let the market become any more illiquid than it already is," he advised. "Stop with the 50 B[illion]. Feel the market, don't just go by meaningless numbers."

For now, all signs point to a raise on Wednesday and potentially more ahead in 2019 despite the President's plea.

Either way, it will be difficult for human traders to beat the machines to the punch on Wednesday as high frequency traders and algorithms pounce on Powell's pronouncements.

It might be best for most traders to make way for the machines and let the dust settle.

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