April 2008 Archives

Technical Analysis can a trader only so far in today's electronic markets. 

Most trading platforms today offer a rich set of technical analysis indicators.

Indicators, which, if not abused shed a tremendous amount of light into a markets momentum, relative strength and patterns, but not much more.

A setup may have increasing momentum, and any number of indicators can readily inform a trader that momentum is increasing (or decreasing), but wouldn't it also be helpful if the trader knew whether the momentum of the accompanying program trades was congruently increasing (or decreasing)?

Answering this question is one of the great assets that TLA (Transaction Level Analysis) brings to the table.

Consider the following scenario, the S&P is moving down sharply and momentum, as measured by MACD is increasing.   A trader in this circumstance would trade to the short side.

But, what if underneath the surface of the down move, Buy Programs were increasing in strength?  Would the demand that they impose on supply shift the dynamics of the move?  Are these Buy Programs run by Smart Money?

This is what happened today, April 29, 2008 in the electronic futures S&P 500 market as shown in the following diagram:



This is where TLA (Transaction Level Analysis) can really lend a hand to a trader.

Tape Reading is making a resurgence.  Tape Reading no longer means a middle-aged man, hunched over, fingering tape from a ticker trying to deduce whether Ananconda Steel or Reading Railroad is being accumulated by the Morgans.

Today, Tape Reading is done via software, and is referenced as TLA (Transaction Level Analysis).  The method has changed but the purpose is still the same...Are the big guys buying or selling, and what is the effect on Price of their activity?

The software for Transaction Level Analysis (TLA), as is all workaday software, is evolving rapidly.  Yet, to our knowledge, there is no viable, workable TLA software is commercially available today. 

The only production platforms are custom, highly guarded and very expensive to build and maintain.

These types of software systems are more similar to weather analysis systems than to standard trading systems as they focus on massive amounts of streaming real-time data that have tremendous amounts of variables.

Real-Time Transaction Level Analysis software must read in, and analyze each transaction, for each contract, for each global market with time-stamps down to the 1/100th of a second, whereas standard trading systems generally do their analysis of a market's 'Open', 'High', 'Low' & 'Close' once per minute.

To understand the massive gap between the data processing demands between a Tape Reading algorithm vs. a Standard Day Trading System using teh S&P 500 e-mini forward contract (ES) as an example.

If your Technical Analysis software is tracking 5 data points from ES contracts each minute during the trading day (9:30 - 4:00 EST) which is 390 minutes (6.5 hours x 60 minutes), you will be processing 1,950 data points/day (5 x 390).

If your Transactional Level Analysis platform is tracking 5 data points per transaction in ES, which had 587,000 transactions yesterday, Thursday April 25th, your TLA algorithms will have processed 2,935,000 data points.

 

As you can see, a software program managing 1,950 vs. 2,935,000 real-time data points per day/per market requires a significant jump-up in software and hardware processing power and intelligence.

One of our goals here at, 'Transaction Level Analysis (TLA) - The Blog', is to give you insight into this world.

   --- Carl Weiss