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Hi Phsst,
Sunday, July 20, 2003, 1:48:30 PM, you wrote:
P> Last weeks Business Week magazine featured an article on "The most
P> powerful Trader on Wall Street".
P> Steve Cohen of SAC Capital Advisors... Hedge Fund operator was the
P> feature.
P> Aside from validating many of your speculations regarding
P> institutional activity, the article pointed out several specific
P> techniques that the big players use to manipulate prices in their favor.
P> But for us little guys, it is a puzzle trying to figure out the tricks
P> that the big guys are playing with our basket of stocks.
Well that's exactly what it is. You have to figure out what you
would do if you controlled tens, hundreds of millions of dollars or
more, and you had pretty much a free hand to trade that money as you
liked. You must think like they think, which isn't so hard, but then
you have to know when they are thinking what, which is quite a bit
harder. In other words, timing is everything. ^_^
So many people assume that this is a purely honest business. Well,
Dr. Pangloss, given both human nature and the stakes, the assumption
leaves me dumbfounded. There are games constantly going on, and there
are generous servings of market movement that are quite a bit less
than completely natural. Efficient markets? Market always knows best?
These are nice graduate school economic theories, and make just dandy
laissez faire capitalist propaganda slogans. But if you don't suppose
some of the worst of human nature gets in here in a large way, I
think it's naive to say the least.
Yes, there is some policing, and yes, some of the most blatant
cheating has been curbed or even eliminated. But it's impossible to
monitor everything all the time, and some of what goes on is
absolutely legal -- it's not against the law to start selling large
amounts of something with the hope of triggering a panic. Maybe
technically that is indeed against the law if that is your *intent*,
but just try proving that one.
And of course the market is supposed to be "rational" enough and
"intelligent" enough to prevent things from getting out of hand. But
even if the market were that "sharp", rationality usually has a
built-in time lag. Panic almost always has a head start on reason. So
when the unusual starts happening, you have the choice of waiting to
see if the market is going to be "smart" enough to detect
"irrationality" and respond to it, or trying to decide if it's your
opinion that is "irrational", and meanwhile your equity is taking a
pounding, which certainly isn't going to help with your own thinking.
In the end, I do believe efficiency ultimately wins out. It's just
that with the open-ended nature of stock markets, there really is no
"end", and even if there were, the road to "the end" can take the
most circuitous routes, and the detours can be great enough to
destroy your account equity or your nerve, or both. I think it's
pretty easy to play money games almost undetected in such
circumstances.
Wonder if I can see that article online. I'd be fascinated.
P> I hinted in an earlier post that I personally look for linear
P> relationships in my backtesting.
If you could expand on what you mean by linearity, and linear
relationship measurement, I'd love to read it.
Yuki
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