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I received the following explanation... thought it was illuminating:
-----Original Message-----
>I would like to suggest that Mr. Lane's interpretation of price series in
the S&P
>on October 15 is a misunderstanding of the meaning of quote machine ticks.
It's
>true that only 40-50 ticks showed up on the quote wire during the run-up.
But
>that metric doesn't report the number of trades. It measures how quickly
the
>"podium dummy" could look around and pick out the highest bids. Let me
explain.
>
>Those quote ticks are generated by price reporters punching reporting keys
as
>they spot trades in the pit. In a fast market like that one, they don't
report
>all the trades, or even accurately reflect the ranges traded. Because of
the
>liability issues, they'll attempt to report the highest prices they can
spot or
>the highest trades reported to them by traders. Even time and sales won't
>accurately reflect the actual trading sequences for the S&P; it provides
the
>official extremes for answering customer challenges. And in a fast market,
>brokers are "not held" for accurate executions.
>
>To better answer Mr. Lane's comments, I performed an estimate based on the
>combination of S&P ticks and E-mini ticks. I would guess over 2,000 trades
took
>place in the run up from 1030 (basis December). Remember that there was
>established resistance around 1030. It appears that around 1,500 trades
took
>place between the breakout and 1040. Another 500+ took place above 1040
before
>the rally broke. I would hesitate to guess how many contracts these trades
>represent, but it was a chunk. Responsive sellers didn't give up until 1040
>where the offers finally thinned out. In fact, I would guess that the last
half
>of the run-up was driven largely by the heavy sellers up to 1040 being
driven
>out backwards through a very small door.
>
>In summary, I would bet any resting stop at or below 1040 didn't get
"skidded"
>too badly. I would also bet Mr. Lane's acquaintances who were allegedly
"stopped
>out" at the top were not actually using stop orders in the market. They
were
>probably using so-called "mental stops", meaning that they gave up when the
pain
>and disbelief finally motivated them to pick up the phone. By then it was
way
>too late to take a small loss.
>
>During day sessions (RTH), I don't recommend using the S&P quotes as a
>comprehensive representation of the actual market. Under more normal market
>circumstances, the E-mini ticks convey better trade information, because
they
>are generated by an actual series of trades crossed by the Globex computer.
They
>don't usually stray too far from the main S&P market and they don't rely on
how
>awake or interested the price reporter might be at the time.
>
>I have no way to validate my trade estimates of the run-up that afternoon,
but
>if a floor trader who was there would care to add, we might all learn more.
>
>I agree with Mr. Lane about limiting equity volatility if one is a
long-term
>position trader. A system that bucks 40 points of adversity in the S&Ps and
>still holds short requires a very stout account with very small positions
if it
>maintains a low odds of destruction. One of the best assessments I've seen
of
>this topic is contained in William Gallacher's book "Winner Take All".
Regards,
Patrick
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