The Federal Open Market Committee (FOMC) meeting today is expected to stimulate a surge in trading activity, leading to a significant shift in intraday trading patterns. Are your algos ready to handle the jump?
The FOMC meets eight times a year to discuss adjustments to monetary policy. In this week’s meeting (20 March) the Fed is expected to release its latest rate decision, as well as update overall economic projections and offer up an (unofficial) outlook on the longer-term direction for indicators including interest rates and inflation.
As the key source of macro direction for the world’s economy, it’s a big news day – and whichever way the pendulum swings will impact investment decisions on a global scale, translating to what could be “a significant impact” on intraday trading patterns.
But what does that mean at the coalface of execution?
“FOMC announcements affect the market somewhat uniquely. When the FOMC announcement comes out, spreads widen even as volume jumps. Both factors must be accounted for to ensure the quality of fills received by an algorithm,” explained Nigam Saraiya, chief product officer at execution algo provider BestEx Research, speaking to BEST EXECUTION.
BestEx Research expects intraday volume to surge at and after 2pm BST (10am ET), exhibiting a more back-loaded profile, with distinct volume bursts at 2pm and 2:30 pm, corresponding to the timing of the meeting notes release and the press conference. This is based on historical analysis, according to its latest client note (released today), which suggests that on FOMC days, S&P 100 symbols see the majority (56%) of their volume trade after 2pm, compared to 46% on regular days.
“If algorithms trade out of alignment with the specific changes in market conditions, it reduces the quality of the fills achieved and ultimately affects performance,” warned Saraiya.
Despite earlier expectations that the Fed could start cutting rates as earlier as March, the latest data from the ‘dot plot’ matrix of individual member expectations indicates just three rate cuts in 2024, likely to start from July: with a further four in 2025 and three more in 2026.
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