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Dan-
(:-)
Thank you for your insights!! Excellent
points made here on your part. Thankfully then; for those using volume
based
indicators; index arb is said to account for only
10% of program trading.
Chas
----- Original Message -----
Sent: Friday, February 04, 2005 5:52
AM
Subject: Re: [RT] PROGRAM TRADING
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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