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Strategies & Market Trends : Playing the QQQQ with Terry and friends. -- Ignore unavailable to you. Want to Upgrade?

To: rab120 who wrote (1674)	8/3/2005 10:59:31 AM
From: Walkingshadow	Read Replies (2) \| Respond to of 4814

Hi Rab, J6P = Joe Sixpack By "program" I am referring to program trading. That is a murky business that is intentionally rather secretive. You won't find stories on Yahoo Finance detailing their activities, that's for sure. Essentially what they do is execute precisely timed and methodically executed quantitatively driven buy, sell, sell short, and cover short orders on specific stocks, typically groups of stocks, sectors, or indices. These programs are of many types, but what they mostly seek to do is exploit sometimes very fleeting market inefficiencies, and typically are particularly directed at quantifying risk as precisely as possible. You can bet the often highly complex and sophisticated input into the quantitative modeling in these programs has little or nothing to do with all the banter and drivel bandied about by the talking heads. I suspect many of them employ talking heads for diversionary strategies and maybe even analysts to build smoke screens and throw off the scent. Another favorite activity I think is the practice of "painting the tape", throwing out diversionary trades to head-fake the growing legions of technical analysts out there who are among the intended victims, and flashing big orders here and there outside the current bid/ask to cause well-timed panic or fits of greed as their purposes dictate. It is widely underappreciated just how profound the impact of program trading is on the markets. The exchanges publish some statistics on this activity. Typically, most of the volume (roughly two-thirds) on the exchanges is accounted for by programs. Here's one example of the sorts of things they do. Let's say a program focuses on the arbitrage between the S&P 500 futures contracts and the fair value of the underlying. Now let's say the futures traders are bidding up the front month contract, and this has created a growing gap between the market for the futures and the market for the underlying equities making up the futures. Obviously this is an unstable condition, because it has created an arbitrage. The only way this arbitrage can be resolved (and they are usually resolved very quickly) is for the futures market to trade down, the underlying to trade up, or some combination of the two. I think you can see that at some point, if this discordance becomes great enough, then it creates a situation where regardless of how the gap is resolved, the arbitrage allows a very simple strategy to become absolutely successful---mathematically, you cannot lose, it is impossible (in fact, the only sure bet on the planet so far as I know). That strategy would be to short the futures market and buy the underlying. Then when the gap narrows, liquidate both positions. Obviously this requires very sophisticated computing power, data feeds, and routing capabilities, because you would have to execute a very large number of orders within just a few seconds. Anyhow, that's just a kind of basic thing. There are numerous variations of just this one basic theme. For example, a program might identify specific market-leading sectors, or specific stocks within sectors that lead the sector (and so the index). The program might also take into account the intraday volatilities in these stocks, then use this information to assign weights for the positions to optimize the move (e.g., weighting fast moving issues or highly volatile issues more than others, or moving in and out of fast moving issues more quickly than laggards). When you learn a little about this kind of thing, then you start to realize how laughably lame and irrelevant most of the talking head drivel really is. It just kills me to see some reporter on the floor of one of the exchanges with a live spot, saying something like, "Well, traders here are telling me they are very skittish about buying stocks right now after analyzing Fed Chairman Alan Greenspan's comments in his testimony before Congress... the mood here is disappointment that the Fed Chairman wasn't more explicit about when the end of the FOMC's tightening will occur, and this disappointment has really darkened the mood of traders, who have been selling shares this morning. Also weighing heavily on their minds right now is concerns over rumors coming out of the mideast that terrorists might seek to disrupt oil producing capacities in revenge for an American operation to clear out terrorist havens from certain parts of Baghdad that began early this morning. We're even hearing some renewed worries about how escalating fuel prices might impact inflation, and cause a rise in the consumer price index and the producer price index. In fact, I just spoke with Joe Airhead of Totally Obscure Investments headquartered in Trailertrash Gulch, Arkansas, and he tells me there is an increasing gloom over the recent developments with the Chinese currency.... seems they're hoping things will be clarified there before they feel confident enough to step up to the plate in a big way." Right. I can just imagine guys who have multibillion dollar portfolios at risk and complex strategies in play offering to blurt out to the whole world exactly what they're thinking and doing, much less sitting around actually intently paying attention to each little bit of news from every little hellhole around the world, mulling things over, and coming to a decision based on that about whether to buy, sell, or short. Anyhow.... hope this helps. T