Last week, The U.S. Department of Labor presented the monthly update on nonfarm payrolls. This would be an example of a scheduled news event. This may come as a surprise to some of you, but did you know that Apiary usually discourages trading during scheduled news events? It’s not necessarily bad to trade during these events, but here is a couple of reasons behind our thinking:
- Spreads widen: The cost of trading in the form of spreads increase during scheduled news events due to the expectation of volatility and risk; liquidity providers will widen the spread to mitigate risk.
- Slippage increases: It takes time for a quote to be sent from the liquidity provider, received by Alveo, and then have a trade sent back to the liquidity provider. The chances of slippage increase even more with the volatility of a news event.
- Frequent whipsaws: The initial reaction to a news announcement is not always right–we’ve all been warned about the consequences of first impressions– and markets can change direction many times before the full meaning of the news is digested.
- Lack of liquidity: Sometimes trades may not trigger due to a lack of liquidity during scheduled news events.
- Hardware issues: The volatility, along with the pace of data, during news events can put extra strain on your hardware–leading to a slowdown in performance or even malfunctions during a news event.
If you choose to trade during scheduled news events, it’s important for you to recognize the challenges associated with this type of trading and be willing to adjust for the probability of increased risk. Keep these points in mind, and as always…