Impossible Tape Trader

[Zzzz1]

When I talked about alternative trading venues I was referring to a fragmented market where order matching takes place at various venues. Even Japanese equities are nowadays traded in dark pools or other alternative venues like Chi-X, though Nikkei futures are traded (at least in Japan) centralized at the Japan Exchange Group's order matching engine. I referred to more broadly fragmented markets because you started to again become more generic and talked about the merits of tape reading.

For Nikkei futures alone it is true that all trading in Japan takes place at the Japan Exchange Group's order matching engine.

And just wanted to clarify something you mentioned, the link to the pdf you posted are only institutions that signed up to the official "market maker program". Those are just a very small snapshot of all the liquidity providers in Japanese derivatives.

What are ATVs for Mini Nikkei volume? Obviously volume in the large Nikkei is important. Nikkei trades on cme and Singapore also with far less volume... where else do you think transactions are being made that aren't reflected in the prints of the Mini Nikkei?

 

[MrMuppet]

@grahamglover: I really appreciate the fact that you are laying out your efforts to get back in the game. It's not easy and the severe change in microstructure made short term trading extremely hard.
My advice for you would be to find strongly correlated markets, have the ladders side by side and go for longer term trades at levels you can find at the volume profile. There is a little bit of edge if you insist on trading outrights.

Thing is, with the HFT's the edge of the free look is gone, i.e. you cant just throw a couple of cars at the screen in front of an important price and get out at even or -1 tick when the level starts to roll through. Levels flip in the blink of an eye and you are instantly down -2 to -4 ticks.

So you need confirmation from outside the market you are trading. Either a news catalyst or correlated markets. However, it can be done, so don't get discouraged.

Second, stop posting on ET! Seriously, I mean it. You sound like you have at least an idea what you are trying to achieve and you are looking at the right things. But within hours, every serious thread gets hijacked by morons who don't. This ok as long as you can shut them up, but guys like Zzzz1 won't go away until you either give in and admit they are right or you close the thread.

Seriously, if you have time on your hands and post for fun, go ahead. But if you really try to achieve something, surround yourself with people who are on the same page and stop wasting your time here.

 

[Zzzz1]

Sorry if my injections come across as hijacking a thread. I take your criticism positively and reflect. But I think we both said EXACTLY the same thing, just that you chose different words, I am not a native speaker nor am I an eloquent speaker, I speak things out the way I see it even if it comes across as confrontational. I do not need to be right all the time (check my most recent posts, I apologized for exaggerations several times and can admit to be wrong where I am). But in this case I simply believe it is dead wrong to look for gold nuggets in the lion's den. I work in hft fx space and frequently talk to a buddy who designs and implements hft trading algorithms and architecture at a pretty well known hft trading firm and I am very convinced in saying that tape reading (defined in the way most understand it) in 2016 is a recipe for disaster. I guess I take your hint and rest my case.

But before that may I float a thought? This forum is to exchange ideas, to be challenged at times, to defend ideas, basically an exchange that sometimes ends up in agreement, sometimes in disagreement. I have never called anyone names a single time since I registered. If someone is afraid to be challenged or rebutted may I suggest to start a personal blog where such person controls who comments and not?

@grahamglover: I really appreciate the fact that you are laying out your efforts to get back in the game. It's not easy and the severe change in microstructure made short term trading extremely hard.
My advice for you would be to find strongly correlated markets, have the ladders side by side and go for longer term trades at levels you can find at the volume profile. There is a little bit of edge if you insist on trading outrights.

Thing is, with the HFT's the edge of the free look is gone, i.e. you cant just throw a couple of cars at the screen in front of an important price and get out at even or -1 tick when the level starts to roll through. Levels flip in the blink of an eye and you are instantly down -2 to -4 ticks.

So you need confirmation from outside the market you are trading. Either a news catalyst or correlated markets. However, it can be done, so don't get discouraged.

Second, stop posting on ET! Seriously, I mean it. You sound like you have at least an idea what you are trying to achieve and you are looking at the right things. But within hours, every serious thread gets hijacked by morons who don't. This ok as long as you can shut them up, but guys like Zzzz1 won't go away until you either give in and admit they are right or you close the thread.

Seriously, if you have time on your hands and post for fun, go ahead. But if you really try to achieve something, surround yourself with people who are on the same page and stop wasting your time here.

 

[MrMuppet]

@Zzzz1 No offense taken. With exposing your background, it's now obvious to me how you cannot understand how "modern" tape readers approach markets.

Look: you guys look into microstructure. Position in queue is everything for you and basically any HFT is more or less trying to emulate the old floor trading game: Either step in front of a big order and ride it for a couple of ticks OR fill the idiot who doesn't know the correct price at the given timestamp and arb it OR you try to game the book, imbalances or any other given special structure in a market. HFT's don't care if a market goes up and down as long as they are the first to get filled and first to dump the position on to the guy behind them in the queue for a scratch.

That's what the SOES - Bandits started, daytraders such as the SWIFTies continued and now HFT's took over. The edge you guys have is a technology edge and an infrastructure edge, just like the SOES guys had. There is a lot of skill involved in developing the infrastructure but no skill when it comes to actual trading. You sit and monitor your algo.

I once had the pleasure to listen to Haim Bodek in a webinar and he was exactly like you. "How can you guys make money off of charts or the orderbook since the computer can do it much faster than you?" He just did not get it.

Now here is the thing: Tape Reading has nothing to do with the way a HFT trades. Zero, nada, nill!
In short: HFT's game microstructure, todays tape readers game other players.
We have an edge over the computers as we rely on parameters that cannot be quantified and abuse basic human behaviour. Because no matter how you twist and turn it, if someone needs to get in and out of an asset with size that cannot be soaked up by regular volume, he WILL tip his hand and it doesn't matter if he uses an algo or pushes buttons

If you do it right, you are able to identify if:
1. There is a major player trying to execute. If there is one, you will find him. He can hide his orders or split them up, but he cannot hide the turnover he does

2. He is executing manually or via algo. If he is using an algo, it is most of the time easier to spot him. Just like in a videogame, the AI executes very fast and very efficient but he always does the same thing. Record a couple of sessions worth of live DOM and you will see the same algo's over and over again.

By watching if, how, where and how much size a market moving player transacts, you can make an educated guess about his intentions and thats how you can make money reading the tape. It's NOT about gaining an edge for a couple of cents, it's about sitting and watching - often for hours - and collect bits and pieces of information untill you have enough to strike.
It's comparable to poker where you can get an edge over the other players by watching their betting pattern in a hand.

So for example a stock has no news but trades double it's average volume on a given day and has a strong directional move to the downside on lots of small prints, but suddenly momentum stops and it gets choppy. Thats a first hint. Then you see big block orders transacting while overall volume dries up. Second hint. Stock moves back to VWAP during lunch hour on no volume and you see a drilling algo eating into refreshing offers just below VWAP, third hint.

At this point you might guess that someone is trying to accumulate stock, but you still do nothing. At 2pm stock rallies over VWAP and offers get taken out with 1k blocks up to a certain price, above that price there is no buying and stock drops back to VWAP where 1k orders start to lift offers again. You get long a small position at the price where the buying starts.

One hour befor the close stock is higher and you see an obvious iceberg on the bid, while every other stock in the sector tanks. He drops once or twice but takes every offer below and puts his iceberg back up 5cts higher. 30 mins before the close SPY and sectors rebound and the iceberg is still there. At this point you add to your long position up to max size and ride the upmove as long as the desperate guy is taking out every single offer on his way.

That's a possible scenario a tape reader is interested in. HFT's either don't give a fuck because they are trading the inside market 250,000 times a day or they can't capitalise on it because they cannot program an algo that puts the puzzle pieces together.

The only way HFT's compete with the tape reader here is when he executes. He probably gets spiked out once or twice or his fill is a couple of cents worse. But that's ok, because he is risking 10-20 cts to make 1$ and not 2cts to make 10 cts like ten years ago.


In short, I can see, where you come from. But you have to accept the fact that there are other trading styles out there that require efforts on a different level than just being fast. So believe it or not, as long as there is a tape and a book - consolidated or fragmented - tape reading will work....and that's the reason nobody with more then two brain cells trades retail FX. There is no information flow, there are no prints there is nothing you can collect information from besides a chart moving up and down

 

[Zzzz1]

I sense your anger and frustration re hft. I am fine with that. But you are possibly missing my point here. I never equated hft with tape reading. My whole point why I mentioned hft is that it obfuscates the market (aside most dma algos) that it becomes virtually impossible to glean information on big size, at least not by watching the order book. I did not make any claim that there is no edge/opportunities by going longer holding periods. The whole point here is on tape reading as it pertains to looking at the order book, volume in T&S and the like. Very large orders are nowadays handled by DMA algos and they can run for days to offload small, tiny chunks into the market to minimize market impact. Trust me when I say you won't identify such large sellers by watching the order book.

Also, maybe you want to consider that someone who designs high frequency algorithms and manages the risk of operational ones nowadays may have had plenty experience in other markets and with different approaches. I have professionally traded various asset classes, from highly liquid, high frequency equity index futures and index options, all the way to structuring and selling OTC exotic rates derivatives in various capacities.

I sense again that we might have various definitions of tape reading. Tape reading for me is a focus on order book dynamics and Times & Sales blotters. Chart trading or trading at latencies where order book imbalances do not matter is not tape reading in my book. You also seem to misunderstand my overall point I tried to make here: Have I ever denied or criticized different approaches? I hold many positions in different trading books for days/weeks/months. I focused specifically on tape reading because that is what the topic is all about. Fragmented markets (US equities) and involvement in DMA algos and hft algorithms make tape reading nowadays virtually impossible to succeed. I agree that there are many trading approaches and that was also my point, why picking a virtually impossible approach when there are so many more promising ones out there?

P.S: I trade on average a 40-50 million USD notional equivalent per day in a pure retail account. What are you talking about? Most those trades are motivated by news flow, changes in fundamentals and macro themes. What else you got in equities or futures other than trades with volume? Sorry but I think that last comment of yours is utterly biased and simply wrong.

@Zzzz1 No offense taken. With exposing your background, it's now obvious to me how you cannot understand how "modern" tape readers approach markets.

Look: you guys look into microstructure. Position in queue is everything for you and basically any HFT is more or less trying to emulate the old floor trading game: Either step in front of a big order and ride it for a couple of ticks OR fill the idiot who doesn't know the correct price at the given timestamp and arb it OR you try to game the book, imbalances or any other given special structure in a market. HFT's don't care if a market goes up and down as long as they are the first to get filled and first to dump the position on to the guy behind them in the queue for a scratch.

That's what the SOES - Bandits started, daytraders such as the SWIFTies continued and now HFT's took over. The edge you guys have is a technology edge and an infrastructure edge, just like the SOES guys had. There is a lot of skill involved in developing the infrastructure but no skill when it comes to actual trading. You sit and monitor your algo.

I once had the pleasure to listen to Haim Bodek in a webinar and he was exactly like you. "How can you guys make money off of charts or the orderbook since the computer can do it much faster than you?" He just did not get it.

Now here is the thing: Tape Reading has nothing to do with the way a HFT trades. Zero, nada, nill!
In short: HFT's game microstructure, todays tape readers game other players.
We have an edge over the computers as we rely on parameters that cannot be quantified and abuse basic human behaviour. Because no matter how you twist and turn it, if someone needs to get in and out of an asset with size that cannot be soaked up by regular volume, he WILL tip his hand and it doesn't matter if he uses an algo or pushes buttons

If you do it right, you are able to identify if:
1. There is a major player trying to execute. If there is one, you will find him. He can hide his orders or split them up, but he cannot hide the turnover he does

2. He is executing manually or via algo. If he is using an algo, it is most of the time easier to spot him. Just like in a videogame, the AI executes very fast and very efficient but he always does the same thing. Record a couple of sessions worth of live DOM and you will see the same algo's over and over again.

By watching if, how, where and how much size a market moving player transacts, you can make an educated guess about his intentions and thats how you can make money reading the tape. It's NOT about gaining an edge for a couple of cents, it's about sitting and watching - often for hours - and collect bits and pieces of information untill you have enough to strike.
It's comparable to poker where you can get an edge over the other players by watching their betting pattern in a hand.

So for example a stock has no news but trades double it's average volume on a given day and has a strong directional move to the downside on lots of small prints, but suddenly momentum stops and it gets choppy. Thats a first hint. Then you see big block orders transacting while overall volume dries up. Second hint. Stock moves back to VWAP during lunch hour on no volume and you see a drilling algo eating into refreshing offers just below VWAP, third hint.

At this point you might guess that someone is trying to accumulate stock, but you still do nothing. At 2pm stock rallies over VWAP and offers get taken out with 1k blocks up to a certain price, above that price there is no buying and stock drops back to VWAP where 1k orders start to lift offers again. You get long a small position at the price where the buying starts.

One hour befor the close stock is higher and you see an obvious iceberg on the bid, while every other stock in the sector tanks. He drops once or twice but takes every offer below and puts his iceberg back up 5cts higher. 30 mins before the close SPY and sectors rebound and the iceberg is still there. At this point you add to your long position up to max size and ride the upmove as long as the desperate guy is taking out every single offer on his way.

That's a possible scenario a tape reader is interested in. HFT's either don't give a fuck because they are trading the inside market 250,000 times a day or they can't capitalise on it because they cannot program an algo that puts the puzzle pieces together.

The only way HFT's compete with the tape reader here is when he executes. He probably gets spiked out once or twice or his fill is a couple of cents worse. But that's ok, because he is risking 10-20 cts to make 1$ and not 2cts to make 10 cts like ten years ago.


In short, I can see, where you come from. But you have to accept the fact that there are other trading styles out there that require efforts on a different level than just being fast. So believe it or not, as long as there is a tape and a book - consolidated or fragmented - tape reading will work....and that's the reason nobody with more then two brain cells trades retail FX. There is no information flow, there are no prints there is nothing you can collect information from besides a chart moving up and down

 

[MrMuppet]

I sense your anger and frustration re hft. I am fine with that. But you are possibly missing my point here. I never equated hft with tape reading. My whole point why I mentioned hft is that it obfuscates the market (aside most dma algos) that it becomes virtually impossible to glean information on big size, at least not by watching the order book. I did not make any claim that there is no edge/opportunities by going longer holding periods. The whole point here is on tape reading as it pertains to looking at the order book, volume in T&S and the like. Very large orders are nowadays handled by DMA algos and they can run for days to offload small, tiny chunks into the market to minimize market impact. Trust me when I say you won't identify such large sellers by watching the order book.

Lol...anger and frustration? Not at all. After a little bit of adjustment, I'm really glad they are there! They are providing so much opportunity since many of them do the same stuff, target the same securities thus giving you really great entries when you know what you are doing.

Also my friend just because YOU can not do it, doesn't mean it's impossible. I'm litterally sitting in front of my screen and watching a big order being processed right now in TXN.

The only thing that makes me mad is the fact that I'm sitting next to two guys who are scalping the shit out of equities and one other is trading STIRS back and forth the entire day with nothing but the ladders up. I'm making my living with this stuff risking my own money and now you are telling me it's not possible because you cannot make sense of it? Come on man, this is ridiculous.

So I really hoped that a constructive conversation could evolve, but I trapped myself. I'll stick to what I wrote above and just quit posting. This discussion neither gives me new insight nor a new perspective on things -> useless.

P.S.: You are right. Tapereading not possible

 

[Zzzz1]

Well , saying "I do it so it works" or "I know a guy who does it so it works" is as credible as saying "I sent believe it works so it can't work for anyone" . I backed up my thought process with multiple in depth examples yet you have done nothing but bitch about hft and how you reportedly beat them all. Sorry that it all does not sound like a convincing argument. I thought this was what this site was about , looking to bring facts to the table to learn together. Maybe you can pick one single example and describe/walk us in detail through one example. That would add a lot more value than moaning about hft and claiming you beat some of the most intelligent guys employed in this industry. After all many of them get paid 300k+ base and a multiple in bonuses. It's a little more than just a speed race in this industry.

Lol...anger and frustration? Not at all. After a little bit of adjustment, I'm really glad they are there! They are providing so much opportunity since many of them do the same stuff, target the same securities thus giving you really great entries when you know what you are doing.

Also my friend just because YOU can not do it, doesn't mean it's impossible. I'm litterally sitting in front of my screen and watching a big order being processed right now in TXN.

The only thing that makes me mad is the fact that I'm sitting next to two guys who are scalping the shit out of equities and one other is trading STIRS back and forth the entire day with nothing but the ladders up. I'm making my living with this stuff risking my own money and now you are telling me it's not possible because you cannot make sense of it? Come on man, this is ridiculous.

So I really hoped that a constructive conversation could evolve, but I trapped myself. I'll stick to what I wrote above and just quit posting. This discussion neither gives me new insight nor a new perspective on things -> useless.

P.S.: You are right. Tapereading not possible

 

[Gotcha]

Well I'd like to put in my 2 cents as this "discussion" goes back and forth. Both of these guys sound smart, but what do we really know about either of them? Both of them just signed up in the past few months, and yet they are here pretending to be the world's hottest trader. Its actually very easy to sound smart about trading, but very difficult to do it consistently profitably, and take trade after trade.

Since I haven't seen verified PnL's from either of these guys, most of what they say can be bullshit. Seriously, at any one time, you can have just as many guys who say don't chase a breakout, as guys who say you should chase breakouts, and you know what, both can be making money, or both can be losing money! Simply put, you really only should listen to someone who is actually making money, and we have no idea who this really is.

On the other hand, even those making money probably cannot even do a good enough job of teaching/explaining because what they do, what they are actually doing, is only in their subconscious. They can go on and on about their rules, but I bet if you looked at their trades, and saw that sometimes they don't enter, even though it looks like one of their setups, the key to making money would be in this "instinct" to not enter. So even before listening to how someone says is a profitable way to trade, I would want to see their own trades first.

My point is that unless any of these guys is willing to show you their PnL, show you a nice subset of their trades so you get some idea of their risk profile and win rate, then all the stuff they debate about is pretty much useless. Perfect example is this tape reading argument. Some can use order flow to make money, some can't, and neither is showing how much money they apparently make using it, or how much they lost using it, and of course how they were even using it to begin with. At this point, they are practically debating about a personal preference. I like potato chips and I dare anyone to come here and tell me they aren't good.

In summary, until someone puts up some stats, and shows some proof, most of what is shared in here is bullshit. So in my opinion, feel free to share what you're doing in your journal if it makes you feel good, but don't expect to find anything useful as a result of sharing. (maybe even don't put too much weight into anything shared if you haven't seen it yourself)

 

[grahamglover]

@MrMuppet - cheers. I spent a good deal of time talking microprices with someone and also with my mate spreading this with other Japan indices. Resding their website - Osaka somehow have a multiple asset order system where you can execute simultaneously across up to 6 asset classes, which sounds like something a lot of money takes advantage of (info is on their website).

I just received a tonne of data I am going to see if I can piece together and view pretty much the things you have pointed out, which is mainly how I trade. I have some software that identifies these things so I can at least eyeball historical volume flow (plus have some software tricks to identify some of these things in the data) and see if there is hope in trading outrights with discretion.

Good points on the benefits of posting. I have learnt of some interesting market perspectives already through you two because of this thread (@Zzzz1 ) - and think I know enough to navigate the BS. But when time is so tight nowadays it could be worth considering going about business without too much hype. Will see how I go.

 

[grahamglover]

I sense your anger and frustration re hft. I am fine with that. But you are possibly missing my point here. I never equated hft with tape reading. My whole point why I mentioned hft is that it obfuscates the market (aside most dma algos) that it becomes virtually impossible to glean information on big size, at least not by watching the order book. I did not make any claim that there is no edge/opportunities by going longer holding periods. The whole point here is on tape reading as it pertains to looking at the order book, volume in T&S and the like. Very large orders are nowadays handled by DMA algos and they can run for days to offload small, tiny chunks into the market to minimize market impact. Trust me when I say you won't identify such large sellers by watching the order book.

Also, maybe you want to consider that someone who designs high frequency algorithms and manages the risk of operational ones nowadays may have had plenty experience in other markets and with different approaches. I have professionally traded various asset classes, from highly liquid, high frequency equity index futures and index options, all the way to structuring and selling OTC exotic rates derivatives in various capacities.

I sense again that we might have various definitions of tape reading. Tape reading for me is a focus on order book dynamics and Times & Sales blotters. Chart trading or trading at latencies where order book imbalances do not matter is not tape reading in my book. You also seem to misunderstand my overall point I tried to make here: Have I ever denied or criticized different approaches? I hold many positions in different trading books for days/weeks/months. I focused specifically on tape reading because that is what the topic is all about. Fragmented markets (US equities) and involvement in DMA algos and hft algorithms make tape reading nowadays virtually impossible to succeed. I agree that there are many trading approaches and that was also my point, why picking a virtually impossible approach when there are so many more promising ones out there?

P.S: I trade on average a 40-50 million USD notional equivalent per day in a pure retail account. What are you talking about? Most those trades are motivated by news flow, changes in fundamentals and macro themes. What else you got in equities or futures other than trades with volume? Sorry but I think that last comment of yours is utterly biased and simply wrong.

My understanding of foreign exchange is that it's all OTC. The forex market is created by brokers ... talk about decentralized. Not sure how one could trade order flow when for sure the real transactions occurring over the phone and unlimited exchanges (brokers)creating a cash market.