Recently in Program Trading Category

What were the effects from the massive rise in Q4 2008 Volatility in  on static algorithmic systems, particularly completely automated systems? 

The following graphic demonstrates the rotation to Buy Programs in the Hole at year end, as measured by the Program Trading Algorithm, MacDaddy.


Happy Trading in '09.

Today shows a fairly textbook example in the electronic S&P 500 market of how and when Program Trades drive the market.

One thing to remember with TLA (Transaction Level Analysis), is that it works best when the markets are active.  In a hum-drum market The Tape is also hum-drum.

Luckily, as traders, we frequently make most of our profits when the markets are active.

The graphic below shows just how prescient these 'machines' (which is what we refer to as the substantial Program Trades) are.



Hope that you think this is as neat as we do.

Have a great w/e.

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.

The  most  basic premise of TLA  (Transaction Level Analysis) is three-fold:

1.    Changes in price are predicated on a change in Supply and/or Demand.
2.    Buy Programs usurp Supply while Sell Programs create supply.
3.    Since program trades are executed in an electronic marketplace, software can be        developed to monitor this action in real-time.

Does this make sense?

A classic application of this is activity when a market is close to stops.  Ever see a market inch up and up and up and then, bammo!  All of a sudden it shoots up an oodle of ticks in seconds?

Why is this?

Most likely, some Buy Programs came on because price was getting close to an area in the market that was easy for the Black Box Trading Shops to program trading strategies around.

There entry into the market, usurped up the local inventory....once these contracts (or shares) were chewed through, price could do nothing but run up to satiate the new demand.

Back to basics...Supply & Demand...an inescapable law.

Happy Trading

Say What?

Front-Running legal?

Well, not exactly.  As a market outsider, I wouldn't know if Front-Running was still possible in this electronic day and age...But I can speculate that the greed in the heart's of men, and market makers, is quite possibly still there.

What I do know, as a Tape Reader, is that in today's electronic markets you needn't be a market maker or specialist to gain from similar profit opportunities available to those who run a book.

If, in today's electronic markets, the theorem that 'Buy Programs usurp supply and Sell Programs create supply' is true, then if you could monitor these programs in real time, you could extrapolate their effect on price (at least in the short-run) and play a similar game to a Front-Runner by knowing that enough Buy Programs were just run, that price, well gosh, it done just gotta go up a smidgen or better.

Thus, as a Front-Runner is illegally profiting from fore-knowledge 1/100 of a second before a trade, today's Tape Readers, can make similar trades, only 1/100 of a second after the trade is complete...

Kinda compelling, huh?

Happy Trading.

A technician  mapping the S&P 500 market would probably conclude that we have begun a new down leg.

The best way to profit from this would be to find entries to go short.  Your choices are to either sell into the down-drafts or to sell new highs.   Both approaches can be very profitable and also quite risky.

How to Use TLA to Minimize Risk

Selling into the down-draft

In the example below, using a TLA algorithm, such as MacDaddy, when price is approaching a recent low, as long as MacDaddy, which is measuring the strength of the Program Buying and the Program Selling, is strong to the downside, a trader can enter into the direction of the  market. 

Depending on the makeup of the trader, their time horizon, internal Technical Analysis, Risk Tolerance and Money Management rules, they can exit before, at or after the identified low.

Selling the High

For longer trades, a trader will need to sell a high and then ride the down-draft.

Here, MacDaddy, is also handy.  The easiest way to apply MacDaddy, is track new highs and when MacDaddy diminishes in strength with the new highs, or is negative at a new high, a trader is safe to enter short with a stop just above the recent high.

Happy Trading.