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Hello Charles,
Your point is well taken. As defined in the weekly report on program
trading in Barrons, "program trading is the purchase or sale of at
least 15 different stocks with a total value of $1 million or more.
Stock-index arbitrage is defined as the sale or purchase of
derivatives to profit from the price difference between the basket and
the derivative." As 90 to 95% of the reported program trading is not
arbitrage, another way to define it is just BIG trades. What I think
that tells me is that in many cases it is just the big hedge funds
making short term large trades. In other words, the market now has a
much larger component of short term long and short traders than it
used to have when most of the large institutional traders were mutual
funds that were longer term (to some extent) traders that mostly only
traded on the long side.
Another place this shows up is in the NY advancing and declining issues.
Most everyone is familiar with the Odd Ball system which bought based
on an increase in advancing issues and sold based on a decrease in
advancing issues. If you have followed this system, you are aware
that the use of advancing issues to signal market direction failed as
a successful indicator around April of 2003 and has not worked
since. That says to me that a lot of the increases in intraday volume
are caused by these big traders and their trading is concentrated in
only a few stocks as opposed to being spread
across the entire market population which, would be the case if the
majority of the activity was coming from retail traders.
My conclusion from all of this is that since April of 2003 we have had
a major portion of the daily trading volume coming from very large
short term traders (Hedge Funds) and that their style and methods of
trading are different. Therefore the use of volume changes as an
predictor of price changes can only be done if you understand their
trading style and methods and have some way to determine when they are
stomping around in the market. Can't say that I have that answer but
maybe some day I'll figure it out.
--
Best regards,
Roger mailto:mailrs@xxxxxxxxxx
Wednesday, February 2, 2005, 8:55:59 AM, you wrote:
CM> Group-
CM> I was wondering if I can get some feedback on the subject of program trading; as it relates to volume analysis. I've been doing a lot of studying on this subject and here's the issue. In the
CM> old days; total volume of shares traded was just that; insofaras it accounted for all the exchange trading. Today; end of day volume of shares traded on both the NYSE and the NASDAQ is greatly
CM> influenced by program trading. It is said to account for about an estimated 50% of all volume. Stated simply; program trading greatly influences total volume. Now; it seems to me this has to
CM> greatly impact the INTERPRETATION OF VOLUME BASED INDICATORS; because we are no longer seeing the pure forces of supply and demand as in the days when program trading didn't exist?
CM> To further complicate matters (if it is necessary to do so; but I am getting ahead of myself here) of all program trading;
CM> only 10% is the index arb variety where stocks are sold; and futures are bought simultaneously; and vice versa. However;
CM> there are OTHER and perhaps MORE IMPORTANT types of program trading strategies which must impact the analysis
CM> of supply and demand vis a via volume based indicators? If I may provide an example. Last Friday sell programs drove the Dow down about 50-points when sell price levels were hit and program
CM> trading came into the market. For DAYTRADING purposes this was valuable information since one could have front run these orders on the short side. However; on some days one would lose money and
CM> the correct strategy would be to fade a sell program by buying into the market at those levels and times.
CM> Daytrading impact aside; is there a way to modify volume based indicators which would provide a clearer representation
CM> of pure supply/demand market generated information for the purposes of swing and end of day trading? If someone could
CM> please share their experiences and there are no answers to this dilema; it will at least save me a lot of wasted time and energy trodding a worthless path.
CM> If you have been with me this far; thank you for your time and attention; and any feedback.
CM> Chas
CM> for by program trading
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