Who creates activity/noise and what counters it

F

fader

originally, my hypothesis was going to be:

program trading, as reported to the NYSE, regularly runs around 50% of the total volume - the majority of program trading is statistical driven.

can one conclude then, that generally half of the volume is created by non-programs (i.e. "humans", discretionary, events etc.) and this "noise" is fairly symmetrically countered / pared / absorbed by the programs.

i am wondering if this conclusion would be far off from reality.

however, i have just looked up the recent program trading stats.
http://www.nyse.com/marketinfo/datalib/1152267398806.html

turns out they have recently changed the calculation methodology and there is a very significant difference: the newly calculated prog. trading share of total volume is only just over half of the old one, i.e. used to be mostly in the 50% area, now around 30% of the total volume.

so in this case my hypothesis would be that programs absorb about half of the "noise" volume (albeit the program's share is ever-increasing).

would anybody have additional thoughts or comments?

p.s. it seems easy to guess how they ended up changing the methodology - under the old one, the last reported week (june 26) showed a surge in prog. volume to a whopping 92% of total volume - somebody must have finally woken up and said: geez, that looks a bit high :) (wouldn't 92% imply the market is dominated by machines trading against each other).
 
Not really. An alternative explanation is that institutional investors are doing more indexation-type trading instead of individual stock-picking. They trade different baskets of stocks on each order ticket instead of a single security. Don't worry. TOBOR, HAL, R2D2 and CYBERDYNE-3000 aren't taking over the landscape.
 
you're still rolling the the dice within the program-driven trading. The algorithms are always changing depending on what's going on.

If a certain system is doing terrible, some head traders will double up hoping that the system "reverts to the mean". Others will cut it until it does better "paper" trading. However during "paper" trading, these trades aren't REAL b/c other programs would have triggered of the systems trades (see Soros reflexive theory).

There's no real way of knowing what's getting "absorbed" and what's not.
 
thanks for the feedback - i didn't think of the indexation angle, it makes sense, especially with the proliferation of etf's.

however, in my assumption of "passive" / reactive volume i didn't include things like hedging individual issues which wouldn't be included in baskets counted as program trading volume.

i guess i have been associating program trading more with arbitrage type, i.e. countering volume, rather than directional.

if a good portion of program trading is directional, then its growth would imply that one needs to focus more on studying trends/momentum within sectors rather than individual stocks.
 
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