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High Frequency Trading Involved in Crude Oil’s Trip to Crazy Town: Najarian


Crude's wild ride has baffled most market participants and no doubt left more than a few of them feeling burned. In the aftermath of the Federal Reserve's QE3 announcement, West Texas Intermediate (WTI) rose to over $100 a barrel last Friday, suggesting to many that a breakout was at hand.

On Monday, in a matter of minutes, the plug was pulled. In less than five minutes on Monday, WTI dropped more than 4%, apparently on no news. As of early trading on Friday crude was just over $92 a barrel, down 8% and counting for the week.

Jon Najarian, co-founder of TradeMonster.com joined Breakout to offer his best guesses as to what's driving these strange gyrations. Though some profit-taking was certainly to blame for the extension of the move, Najarian suggests it was a combination of high-frequency trades, emotional trading, and political rumors driving the crazy train.

Starting backwards, every rise in oil triggers speculation that President Obama will release oil from the Strategic Petroleum Reserve, or SPR. "Just the rumor of this is enough to push people to the sidelines," says the 30-year veteran of the trading pits. These rumors used to be passed around the trading floor like a high-stakes game of Telephone. These days they start in computers trolling through the internet, looking for headlines concerning an imminent move from the oval office.

What would happen if the SPR was actually used? Not a lot. Last year when the President released what amounted to less than one day's supply, crude oil dropped and roared back. If past is prelude, and traders generally assume it is, we'd see "another whoosh to the downside then an immediate bounce up." In this case the SPR wasn't tapped, meaning there wasn't a reason for traders to buy the dip.

All of which is a good theory, but it doesn't explain the action in the drillers later in the week. Near the end of trading on Wednesday, the stocks of companies like Diamond Offshore (DO), Ensco (ESV), and National Oilwell Varco (NOV) went as much as 8% higher then all the way back in a matter of minutes. Diamond Offshore added and lost nearly $1 billion in market cap on the move. Real money — even by the standards of Wall Street.

Leaving conspiracy theories aside, Najarian says the way for individuals to play is via crude, using the charts. "If crude gets back down here to $88 to $90, I think you load the boat." With volatility so high, he suggests bidding "under the market" (putting in a buy order well below the current price). If you get long from a quick drop, you can book a quick gain. If crude doesn't bounce back immediately, Najarian says you can count on the Fed to reduce the value of the dollar enough to drive the quote on crude higher.

There are no sure things, but in a tape this suspicious individuals can either sit it out entirely or play the wild ride they have before them.