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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 )

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.

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