"The Strategy": a theory of market manipulation by big funds (Knuteson, 2018)

[slvrrisc]

Taking an uninformed guess at this big money market "manipulation" theory of the author. Maybe the author is referring to index futures purportedly making their biggest range moves during the overnight and hours outside of the (nyse) regular session hours, where futures also often move plenty a few hours (london session) before the regular session open. Or alternately, it could be that these big funds are just catching on after these overnight positive gaps and extending the move riding the momentum each day, then selling off at the close but the overall print ends up still another postive bar where there is still interest by the smaller players overnight and at the next open. Until it reaches a s/r level or whatever the point the big funds deem is a reversal point, then dump for the rest of the smaller players to be bag holders as the market retraces and sells off for the next sessions while the "manipulators" wait for their next opportunities. ( I wouldn't be inclined to take the author seriously either, as I think it's likely he's not a successful retail trader himself and is using his 'platform' to voice out his concocted explanatory theories about "manipulators" he imagines are making bank in this way. )

 

[d08]

My unfounded theory is that greed declines in the afternoon and fear rises, the "anything can happen overnight" concept. When the next day arrives without armageddon, they re-enter the old positions. It's possible the daytraders do this for leverage and margin cost reasons as well.

 

[bh_prop]

The author is misinformed. I think he was trying to imply in his incoherent rant is some hedge funds are using the overnight market to pump up positions & sell into the open. This is perfectly legal.

This is exactly why buying the close and selling the open is so much more profitable than the reverse - the reverse being what the author is wrongly suggesting

 

[Overnight]

This is exactly why buying the close and selling the open is so much more profitable than the reverse - the reverse being what the author is wrongly suggesting

Have you tried it with any success? Buying the close and selling the open?

 

[science_trader]

Have you tried it with any success? Buying the close and selling the open?

Academics do it all the time. At least in their wildest dreams.

 

[Overnight]

Academics do it all the time. At least in their wildest dreams.

Exactly. Nobody does it, because it is fake and does not work. Else everyone would be doing it with real monies.

 

[bone]

Knuteson is NOT arguing that his strategy is optimum.

His argument has merit to a very limited extent - but it’s incomplete. Written like a true short timer analyst with a very incomplete resume in the markets.

Since 2008, buying and holding clearly outperforms buying and selling during the same trading session.

 

[ironchef]

This is exactly why buying the close and selling the open is so much more profitable than the reverse - the reverse being what the author is wrongly suggesting

Why don't you backtest your statement with SPY and see how profitable.

I did. Backtested SPY from 1993 to 2019: Bought at close price and sold at next morning's open price. Not that profitable especially not as good as buy and hold SPY from 1993-2019, even without subtracting the cost of bid/ask and commissions.

 

[d0rian]

Exactly. Nobody does it, because it is fake and does not work. Else everyone would be doing it with real monies.

Why don't you backtest your statement with SPY and see how profitable. I did. Backtested SPY from 1993 to 2019: Bought at close price and sold at next morning's open price. Not that profitable especially not as good as buy and hold SPY from 1993-2019, even without subtracting the cost of bid/ask and commissions.

?

This phenomenon -- overnight returns substantially outpacing those from regular market-hours -- has been well-documented by plenty of studies (e.g. 1, 2) across a wide cross-section of developed nations' equity markets, even if the reasons for it aren't all that well understood. There's nothing "fake" about it, nor is it some novel observation Knuteson's making; he's just proposing a theory to explain the well-established pattern...the theory apparently being that it's due to large funds engaging in quasi-manipulative (debatable) practices, resulting in the day-vs-overnight splits.

 

[science_trader]

Whoever has access to the right data (not relying on bid/ask & ohlc data), understands fully the auction process, and has a clear view on order types and exchange rules (i.e a SKILLED PROFESSIONAL) knows what is real and what is not. All these studies should be classified vertically, to say the least.