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Charles Meyer wrote:
Roger-
I really appreciate your thoughtful
and insightful response. I have always maintained that in order to use
volume effectively;
one would need to know:
* who is buying, how much, at what
price, and for what reason
If you knew that, you wouldn't need to use volume...
Of course you reference BIG trades
but the other elements of the equation are missing; unless you are the
one placing
those trades. (:-) I suppose this
is simply repeating what you have already pointed out; perhaps more
eloquently. (:-)
I thought the whole point using volume was to simply the assessment of
the strength of buying, ie, buying with higher volume means something
different than buying will lower volume. Whether the buyers are 'big
buyers' or 'little buyers' should mean little, as long as they are
buyers.
Where this fails is if arbitrage or other hedging activity against
derivatives creates a false impression of high volume associated with a
given move. For example, if, all else being equal, a stock or index
would have moved up with low volume, but by coincidence some
arbitrageur executes some stock-future arbitrage trade that has no net
effect on price, but makes volume look high, this arbitrage activity
would distort the volume figures and might make one reach the wrong
conclusion. This is where I would see arbitrage-related activity
causing a problem for volume based analysis.
Regards
DanG
What led to the demise of Wordon's
tick volume was the premise that an uptick was a buy and a downtick a
sell. Well yes;
but not that simple. Scale trading can be taking place with a large seller
getting out on upticks, etc. Ditto for accumulation
taking place on the books on
weakness; and over a longer period of time with a greater number of
orders and for smaller
quantities.
Chas
-----
Original Message -----
Sent:
Wednesday, February 02, 2005 11:25 AM
Subject:
Re: [RT] PROGRAM TRADING
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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