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Strategies & Market Trends : Technology Stocks & Market Talk With Don Wolanchuk

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Dec 19 4:00 PM EST

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To: kidl who wrote (41261)	7/13/2009 12:19:33 AM
From: catflu2™	Read Replies (1) of 207358

depends on the contract, its liquidity fungibility etc. The implication I was making is that they can create a synthetic side if a real one doesn't exist,park it in a slush account and deal with it later. Presumably it is dealt with through manipulation ie. selling a position hard to create inventory on the downside or buying if that was necessary. But that is a paranoid assumption. Potentially a life saving one as well. If you keep eyes on the prize in mind consider this example: Stock A is traded in London and the price is roughly equal to that in NY with a exchange rate adjustment.Roughly is the key word here. "Roughly" means there is profit potential. So, since the exchange rate can alter the absolute value of the stock and the exchange rates and stocks are obviously not linked, you can "arbitrage" the price differential with minute trades . The prize is to either short a stock using the exchange rate price differential or build a position using other peoples money. Essentially a market making function pocketing the spread.The mechanics of it vary from market to market. You are only concerned with the absolute value of your position in Dollars. So you can write the software to take advantage of that theoretical situation. A three way trade. That is different than straight arb. An arb on the futures market would consist of-for instance-the differential in the SNP big and small contract. The biggie is only floor traded during the day but at night five minis equal a big one. Since the mini is traded in increments of .25 and the biggie .10 there is a few cents you can scalp if you buy and sell the same contract simultaneously.That loophole was closed a few years ago. This theory only works with automatic systems and no human is fast enough to take advantage of it. But suppose you knew the software trading parameters for straight equity trades from GS and could "Push" the system with futures trades. This is the scenario Chief alluded to a few posts ago. I suppose those levels could be inferred with careful study. It is fascinating stuff. I have no idea how he figured it out. I am not a programmer or an employee of any of the big shooters but I've known a few. My examples are limited to actual situations and were proprietary for years. Things are much more sophisticated now and I can't give you any insight into what Sergie stole from GS or how it worked. There are probably only 20 or thirty people in the world that would understand the algorithms. I still hold the belief that dow equities push the futures so I'd get some argument from Chief and some PHD's in Chicago. As I get older I'm beginning to believe that both situations occur. Regulations are about twenty years behind technology. But they were never designed to protect us anyway, just to make it really confusing and arcane.

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