Program Trading

Pabst - Do the minis allow arbs to get in on the bid and offer in a much more precise way than arbing into the pit on a big contract in years past.

Do the ecns allow a person to bypass a specialist and fine tune their bids and offers (yes somewhat). Consequently you can make sure a nyse stock trades closer to its relative S&P value on a tick by tick basis. Silk and I both agree on the fact that many NYSE stocks now trade at the right price almost all day long.

So the question is-- does a somother or compressed one minute chart lead to lower vol on a daily chart?

Pabst duing the mega vol trade, if these ecns were even around on nyse stocks they were immature with less volume. Also you have to remember guys with computers were not able to do this as efficiently until the reduction to penny spreads.
 
I've always assumed that programs keep the cash and futures in line sync. In that sense, programs probably slightly reduce volatility and keeps the market honest. But the impact of programs on volatility is slight compared to world events, corporate action etc ...

I maintain that volatility is substantially explained by market liquidity. When everyone wants to sell and nobody wants to buy, liquidity dries up and markets get very volatile.

For efficiency reasons, programs usually don't trade all 500 names, but pick up on a basket that will give the best beta/correlation with lowest variance vs the index. This helps reduce overheads by trading fewer than 500 names.

With the growth in programs, the interesting trade is in figuring how to trade around high beta/low variance members of the S&P against low beta/high variance members.
 
Volatility is driven by changes in assessments of the fundamentals, not liquidity or order execution or more efficient arbitrage techniques. The more unclear or risky the fundamental assessment, the more volatile the price.

99-02 was volatile because the market was dominated by companies whose business valuation was incredibly volatile. AMZN could have been valued at $5 or $50 billion on any given day, based on a couple of key variables. How do you value an ARBA or MSTR with any precision?

Now most of those companies are gone, and the survivors are either tiddlers with no index impact, or have become much more stable. Hence market volatility is much lower because business volatility is much lower - the dull blue chips are back in charge, and they are inherently less volatile and risky.

Throw up a currency crisis, debt default, a war or bomb attack, and it'll get volatile again. Just don't expect 2000-02 volatility, unless the market gets dominated again by insanely unpredictable quasi-startups sporting multi-billion market caps.

Alternatively, just go where the action is. MSO and TASR are hardly flatlining, quants notwithstanding.
 
Quote from Cutten:

Throw up a currency crisis, debt default, a war or bomb attack, and it'll get volatile again. Just don't expect 2000-02 volatility, unless the market gets dominated again by insanely unpredictable quasi-startups sporting multi-billion market caps.
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Perhaps we're talking about two sides of the same coin.

Take a series of corporate defaults - this causes volatility because everyone wants to get out of a long exposure to the credit and equity or go short and nobody wants to take the other side.

If instead we insert a market maker in credit with unlimited funds who stands ready to make a bid and keep an orderly market, thereby providing liquidity - I suspect that the consequent volatility will be severely muted.

The markets are, after all, a place where investments can be made. Since investments are necessarily funded by savings, a major role played by the market is really as a substitute for a traditional bank. Volatility in the market is analogous to a run on the bank - which occurs precisely because the bank has insufficient liquidity to meet withdrawals.

Thus, the recent drying up in volatility is due to reflation policies at the Fed.
 
Quote from ertrader1:

Thats right folks, its not the "daytrader" or the mom and pop trader or the I wana do this part time trader that traders like me trade against. PROGRAMS.......the market is going to PROGRAMS and i can forsee in the future, Specialst automated Programs.

PROGRAMS PROGRAMS PROGRAMS, we trade aginst,
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but programs and algorithims trade off fixed patterns and criteria,until modified... these things can be easily predicted within a time period.. can be anticipated. what is much harder to predict is human's irrational behavior..
 
Quote from marketsurfer:

ahhh, that is not accurate. when we speak of programs, what is being referred to is quant based systems that exploit minute inefficiencies across the spectrum of tradeable instruments using vast sums of capital. we are not talking about electronic "basket" type equity executions.

best,

surfer:)
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statistical arbitrage.. has been in existence for decades.. right, the idea is if this system picked up a gazillion pennies and nickels that nobody "cared" about, in the long run, it'd rack up sizeable $$$$.. kinda like picking up a gazillion pepsi cans and getting a nickel a piece.

imho, it's a niche area in trading which has no relevance to other styles of trading.. market influence such as manipulation, human emotion, and irrational behavior is difficult if not impossible to quantify.
 
Quote from ertrader1:

volitity IMHO is created by fear and uncertainty. NOT PROGRAMS.

Look at the Asian crises, and the last few months of the BULL market.

Fear and Uncertainty cause huge volititly. Greed can cause a trend....like the last 7 months of the BULL market, and there was some good volitilty cause by Greed as well.

Complacency will cause low volititly until fear enters the picture.

So, IMHO emotions cause volititly, the more emotion you have the more volititly you have.

However, dont confuse volititly with VOLUME....
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this is true.. when the public is involved in the markets, it adds a dimension to market volatility. i don't mean to oversimplify, but what i see in the current markets, the lack of volatility and an illusion of efficient markets is the absense of public participation and emotion.. fear and greed. the public has not made signficant influence on this "bull market". they simply don't care.

it's like the reward has diminished and the competition amongst professionals has increased..
 
"Volatility is driven by changes in assessments of the fundamentals, not liquidity or order execution or more efficient arbitrage techniques. The more unclear or risky the fundamental assessment, the more volatile the price."

Very true.

Volatility is the risk premium to which investors attach to a given asset, be it equities, fixed income, etc.

As Cutten so accurately points out, the dull "Blue Chips" which have tremendous earnings transparency and little earnings variance from what is forecasted or expected are leading this bull market, and not the incredibly volatile earnings that were inherent to the hi-beta dot-bombs or telecom names from 1999-2002. As a result, the market is experiencing some very low VIX numbers while being in the rally phase.

I would also mention that I beg to differ with those that feel that the public is not participating in this current market. The fact of the matter is that the Program Trading statistics that I posted at the beginning of this thread state that 59.6% of the NYSE volume was program related. That means that pension funds, mutual funds, hedge-funds, sector-funds, index funds, etc. are using program trades to get in, and get out of this market for their clients. Who are their clients?

John Q. Public
 
Quote from silk:

Also, something changed bigtime over the last 18 months. Instead of an institution placing an order to buy 7k shares of a stock. They are placing 10 orders to buy 700 shares over say a 20 minute period. Its this type of "program" thats killed trading.

Individual orders are no longer a determinant of price. There are no plus tick large bids or large offers supressing the price.

No aberations. The price is what it is and is the "fair" price. Arbed perfectly down to the penny.

To make money now you have to have a system that forecasts where a stock is headed 15 to 30 minutes down the line or farther. And that is no easy game! Extremely difficult, but not impossible.
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I do not know you, but your view is correct that it is not easy feat to stay in the mkt 15 to 30 minutes. The reason is there will be lots of tree shaking going on by large manipulators.

Only instinct, guts, and experience can save you. No books or seminars can teach you how to day trade.

As far as swing trade, you have to accept higher drawdown.

Goodluck to you all.
 
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