Reg FD and Tech Analysis

[AAAintheBeltway]

Jim Cramer has an article reporting on the SEC's enforcement action against SEBL for revealing nonpublic information during a Goldman conference with 200 people present. Apparently the SEC is taking the position that such information must be disclosed initially in a press release or on the company website, not at a private conference for big bucks clients of a wire house. Cramer commented that this will make life difficult for hedge funds who are used to getting such information and trading on it before it is widely available.

I fully support the SEC's position, but I wonder if it will not have unforeseen side effects. The fundamental premise of technical analysis is that smart money leaves tracks in the market that you can follow. The premise is the same whether you are trading breakouts or reversals. Now paradoxically, we may be in a situation where the smart money will be just as much in the dark as everyone else.

The most obvious effect will be many more gap openings, based on new data being released by issuers. Hello gap and go.

 

[vladiator]

Quote from AAAintheBeltway:

Jim Cramer has an article reporting on the SEC's enforcement action against SEBL for revealing nonpublic information during a Goldman conference with 200 people present. Apparently the SEC is taking the position that such information must be disclosed initially in a press release or on the company website, not at a private conference for big bucks clients of a wire house. Cramer commented that this will make life difficult for hedge funds who are used to getting such information and trading on it before it is widely available.

I fully support the SEC's position, but I wonder if it will not have unforeseen side effects. The fundamental premise of technical analysis is that smart money leaves tracks in the market that you can follow. The premise is the same whether you are trading breakouts or reversals. Now paradoxically, we may be in a situation where the smart money will be just as much in the dark as everyone else.

The most obvious effect will be many more gap openings, based on new data being released by issuers. Hello gap and go.

You make some interesting points. Obviously smart money isn't as "smart" now as it used to be. There's a paper by a guy from Arizona State (or U of A?) that looks at informed trading around earnings announcements pre and post Reg.FD. He shows that pre FD large block trades were in the direction of the upcoming earnings surprise and post FD there is no informed trading before announcements, rather, it's all after the release.
So you are right in that regard. As for the implications for TA, I think there's plenty of room left. Although I guess it depends on how you use TA. I'm actually using it to go against the uninformed order flow when the latter goes too far. So to the extent that now there's more uninformed flow, the opportunities are even greater.

 

[AAAintheBeltway]

I think the game may become harder. There are basically four kinds of "money", namely smart money, big money, dumb money and fast money. Fast money hopefully would describe us. We can make money by following smart money, butting in line ahead of big money or fading dumb money. Now we are faced with losing smart money as a tell. Big money is not a bad indicator because it can make itself right. But it tends to be lethargic. Dumb money is not as easy to fade as people will tell you. It tends to run a lot with big money, until they part company at the extremes and big money leaves dumb money to clean up the mess.

The recent popularity of ETF's is no doubt a reflection of smart money being shut off from inside information. If smart money is reduced to sniffing out what big money is doing (another name for this is market timing), then better to use the ETF's than risk getting blindsided by some stock blowing up.

 

[TGregg]

Quote from AAAintheBeltway:

I fully support the SEC's position, but I wonder if it will not have unforeseen side effects. The fundamental premise of technical analysis is that smart money leaves tracks in the market that you can follow. The premise is the same whether you are trading breakouts or reversals. Now paradoxically, we may be in a situation where the smart money will be just as much in the dark as everyone else.

Let's examine this ala Scott Adams (of Dilbert fame). Which is more likely, that the SEC has suddenly decided to give the shaft to the rich guys with the deep pockets (violating a long tradition of shafting average investors to favor these deep pockets and creating a fair and honest market for the first time in history), or that the SEC is mostly making cosmetic changes so that the average investor can pour in some more money? Would it help if I point out that the guy who runs the SEC ultimately reports to politicians?