Your Economy (No Politics)

[dipsey]

Bullwinkle..

In trying to come to grips with the overall impact that program trading has on market movement I referenced your post and wrote the following comments as my understanding. I would appreciate your commentary as to whether you see any errors in my observations or implied conclusions...

Thanks..

When you look at the numbers it becomes obvious that these relatively few participants in the market dictate through their actions where the market is going at any given point in time.

"Program trading encompasses a range of portfolio-trading strategies involving the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more."

Now, this does NOT include any other trading which might be being done by computers, only the simultaneous trading of a basket of stocks. One must assume that there are other sophisticated trading programs which do not meet with that reporting criteria. Consequently, the total volume of NYSE stocks which are being traded by computers has to be some number well above the 60.8% which meet the reporting criteria.

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Program Trade Avg'd 60.8% NYSE Volume for May 22-26
http://www.nyse.com/Frameset.html?displayPage=%2Fmarketinfo%2FProgramTrading.html

View the Top 15 Most Active


http://www.nyse.com/pdfs/PT052206.pdf

May 22-26 60.8%
May 15-19 61.2%
May 8-12 59.3%
May 1-5 57.9%
April 24-28 58.2%
April 17-21 57.2%
April 10-14 59.2%
April 3-7 59.5%
March 27-31 63.9%
March 20-24 59.0%
March 13-17 68.9%
March 6-10 57.0%
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12-Wks Rolling Avg 60.2%


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Comments:

Elephants and program trading.

In the first URL click on previous years to see how program trading has increased dramatically over the past several years. Eyeballing the numbers; 1999 about 20%, 2000 about 25%, 2001 about 30%, 2002 about 35%, 2003 about 40%, 2004 about 50%, 2005 about 56%. The way the game is being played is markedly different in 2006 from 1999. One must also assume this trend will continue; we will exceed 60% this year and probably 65-70% next year.


In the second URL is a listing of the major players.

Quite frequently you will hear commentary in the financial press concerning volatility in the markets being the result of hedge fund trading. Do you see any hedge funds listed in the top fifteen program traders? I don't see any hedge funds listed... unless they are hedge funds being operated by these large trading houses. These are the elephants. My understanding of the three categories is "principle" = for the account of the house, "customer" = for accounts of their customers, and "agency" as acting on behalf of another institiution (such as a hedge fund, mutual fund, pension plan, etc.).

Note the third largest trader, UBS Securities, virtually all their trading is as principal, for their own account. This is the company which stresses in their commercials, "You and I, U & I, UBS," as an invitation to the personalized attention you will receive if you move your accounts to them. The truth of the matter is that they are the big gorilla when it comes to trading as principal.

In a footnote to the upper right hand box: "Does not include program trading activity by non-U.S. subsideraries of NYSE member firms." So Merrill Lynch, with a subsiderary in Japan, could program trade back into the U.S. market and not have it counted in the total.

In the same upper right hand box it lists program trading in "Other Domestic" markets as being 44.5%, up from 40.6% for the previous 52 weeks. My assumption here is that "Other Domestic" is NYSE shorthand for NASDAQ. If the trend with NASDAQ is similar to that of NYSE we will probably have over half of NASDAQ stocks being program traded by next year.

The rhetorical question becomes: "So, of what relevance or importance is all of the above?" Answer: Knowledge of how the market works with respect to whom is making it do what it is doing.

In the financial press, or on the televised financial programs, there is this constant stream of explanations as to why the markets did this or that. "The hedge funds were taking profits" or "Traders were concerned over ___ " or some other meaningless drivel. The factual condition is that this smallish number of elephants, the large houses, are what drives the markets; not individuals, not day traders, not even hedge funds.

As an aside, with respect to hedge funds, it is worth noting that estimates are that hedge funds have employable capital funds of $1 Trillion dollars at their disposal. The large houses, collectively, have capital resources four times as large, $4 trillion. There are some hedge funds with good returns, but on average they returned less than 12% last year... some did far better, but a goodly proportion actually lost money for their clients. (I have no URL's for this data, but have come across it in reading and made note of it.)

Elephant tracks: If you have access to a charting program where you can display an intraday screen on individual stocks and indices you can quite frequently see where program trading is being utilized. If you compare say five minute charts of various stocks in a particular sector you will find that the charts are frequently all congruent, they all look the same. Say between 1015 and 1030 they all were drifting lower in price, and then precisely at 1030 they all started to rise sharply and did so for five minutes, then they all went sideways for the next ten minutes. What is interesting about the movement is that some of those companies will be among the best in the sector, high growth and earnings, while others will be of lesser fundamental quality, perhaps having no earnings. That they should make identical moves in the same time frames is illogical... unless those moves are because they are included in a basket of stocks which is being actively traded as a unit. Elephant tracks.

Comments appreciated,

Regards, dipsey