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Strategies & Market Trends : Cadaver's picks
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From: Cadaver6/28/2007 10:22:53 AM
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June 28 thru 30 is russel rebalancing and many investment banks do whats called reversion trading. Essentially fund managers allocate capital to trading desks with the following arrangement.

* funds give traders a list of securities and quantities called a basket and millions (or even a billion) dollars to trade with
* trading desk agrees to guarantee funds the closing price of Jun 30 for every security in the basket
* if they get a better rate, the profit is shared between fund and desk

To make this profitable, trading desks would have to buy on the lower prices on 28th/29th/30th and the market must close higher on 30th. If the market closes lower on 30th, trading desk typically loses money.

One strategy is to push the market lower on 28th/29th by massive selling and then buying it back rapidly with the hope that others jump in.

Even small amounts of price changes mean quite a bit when you are playing with a billion. For example, if the trading desk could arrange a sharp 1.5% jump in QQQQ like they did yesterday, thats .72 * 1M = 720,000. If they can buy and sell on 3 volatile days thats 2.5Million right there.

What does this mean to us? Volatility on the last 3 days of june is a given. Any sharp move in one direction is likely to go the other way the next day.

Contrarion day traders make the most money here. Buy on panic selling, sell on greedy buying.

-Cadaver
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