Electronic Futures: June 2008 Archives

Remember Black Monday?  What caused it?

The most popular explanation was Program Trading. 

(see - http://en.wikipedia.org/wiki/Black_Monday_(1987)#Causes).

Back then, software had yet be created that could track and either prove or disprove this theorem.

Today, this type of Program Trading monitoring software exists and is referred to as TLA (Transaction Level Analysis).

Below is a view of yesterday's 400 point drop in the Dow and what the corresponding S&P 500 Futures Sell Programs looked like.

You will note that the price of the Dow 30 does not begin computing until the 9:30 a.m. EST open.  To show more interesting data the S&P Futures market is also plotted in the pre-market because that is when The Machines (our vernacular for the computers that initiate the buy and sell programs) kicked on when the NFP (Unemployment Number) came across the wire.

A couple of things to note are:

1.    The Buy Programs never really lit as can be seen by only tiny spurts of Green
2.    The huge amount of selling that poured into the close...Margin calls show no mercy.

Keep in mind how the Law of Supply & Demand pertains to how Program Trades effect changes in price:

1.   Buy Programs usurp Supply thereby pushing up Price.
2.   Sell Programs create (increase) Supply thereby pushing Price down.



Hope that you found this interesting.

Wouldn't it be cool if you had an electron microscope that you could focus on the markets and view in real-time, or historically, what a reversal looked like at the atomic or sub-atomic level?

We all see these reversals and wonder...."What happened in there?".

Gosh, we put 'em up on a 1 minute chart (or 1 second or 1 tick...choose your fancy), stare at the market turn and say either, "Where did I go wrong?" or if you caught it correctly, "Aren't I so smart?".
 
With this extended post we are going to attempt to document our understanding of how a 'run-of-the-mill', pedantic, everyday, healthy, easy to trade, profitable reversal looks like under a custom-crafted electron microscope built for the electronic markets....basically, the heart and soul and guts of TLA (Transaction Level Analysis).

(For a feel of how much data gets processed with these tool sets check out -  http://www.transactionlevelanalysis.com/2008/04/why-tape-reading-matters.html )