Guest post by Macro Story;
Trader psychology is arguably one of the most important aspects of a successful trader yet one seldom understood let alone studied. In the book Beyond Greed And Fear (Hersh Shefrin) I found two interesting discussions relevant to the current market.
Most traders view themselves as above average, able to move independent of others with superior skills.
“In a survey, drivers were asked how good a driver are you. Relative to the drivers you encounter on the road you are (a) above average, (b) average or (c) below average. Between 65 and 80 percent of the people who answer the driver question rate themselves above average. Of course we all want to be above average but only half of us are.”
“People have very poor intuition about the behavior of random events. With gambler’s fallacy, they expect reversals to occur more frequently than actually happens.
I usually divide students in my MBA classes into two groups. I ask everyone in the first group to take a coin, toss it one hundred times, and record the sequence of heads and tails that result. I ask everyone in the second group to imagine that they are tossing a coin, and to record the outcome of an imaginary sequence of one hundred tosses.
Then I collect the responses of each group and analyze each student’s response according to the number and length of the runs (consecutive heads or tails). What is the point? The imaginary tossers do not generate enough long runs as compared to the actual tossers.
HFT provide Liquidity, narrow Spreads and decrease Volatility, or? Welcome to Algomania, once again.
”This is not the end, it is not even the beginning of the end; maybe it is the end of the beginning.”
Guest Post by Grommen.
Every production phase or civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.
When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. Transitions are social transformation processes that cover at least one generation (= 25 years). A transition has the following characteristics:
- it involves a structural change of civilization or a complex subsystem of our civilization
- it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other
- it is the result of slow changes (changes in supplies) and fast dynamics (flows)
Examples of historical transitions are the demographical transition and the transition from coal to natural gas which caused transition in the use of energy. A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.
Full paper by Mr Grommen A new stockmarket crash, a pattern.
…and yes, we have learnt, it never is different.
Fed officially delivered the Operation Twist message yesterday. The bond markets have been pricing in this for quite some time, while the Equities markets have been busy following news flashes out of Greece. The 2/10s have been “coming in” for weeks, and extended the moves yesterday. The last chart shows that SPX has not been reflecting this, yet….Charts from DShort.
For anybody trying to buy or sell more than a couple of thousands shares, HFT is not providing liquidity. Yes the spread is smaller, but it is virtually impossible for a fund manager to put money at work at any given time, as the prices simply are not statistically significant. The Trader has argued for quite some time, that yes, we need the new technology, and we use it ourselves, but the Predatory Strategies by certain HFT Firms, is not adding to liquidity, it is not creating a more effective environment, but it is feeding the exchanges, and slowing down the system for non HFT due to quote stuffing etc. We are not arguing for going back to the Good Old Times, we are just arguing for the HFT Firms to be regulated in a fashion, so the Market Structure improves, not get worse. The total effect to the Society is a Loss, despite some of these firms making extra money. The Market is showing a Structure Fatigue, that could lead us to a total breakdown of the system.
As we have provided many negative aspects of HFT, here is a PRO HFT argumentation, by Mr Narang. Let’s see how long they will stay in business, as the Regulators will start the Witch Hunt. After reading the below, check out the latest from Nanex, as HFT brakes the speed barrier of light….
In recent months, a plethora of articles have remarked on elevated levels of market volatility, while simultaneously pointing out that computers generate an ever-growing share of the market’s volume. The implication, or in some cases, outright accusation, is that the latter is the cause of the former. While the recent front-page New York Times article on this topic refrains from outright casuistry, it does follow the typical pattern of using coincidence to suggest causality. Not only is this sub-par journalism, but it is bad statistics — particularly when the numbers themselves can easily be used to draw relevant causal inferences.
The article correctly notes that there has been an increasing incidence, in recent times, of days exhibiting unusually high volatility (measured as days when the close-to-close return, or alternatively, the high-low trading range are large in magnitude). However, in sharp contravention to what is now the conventional wisdom, the very same data used by the article’s authors also reveals that computerized trading (in particular, high-frequency trading), bears absolutely none of the culpability for this.
Full article here.
As if Operation Twist wasn’t enough, China’s PMI comes in at 49.4 (below 50 is not so great…). Hang Seng is tanking 4,1% in it’s biggest fall in years, and CDS prices are shooting higher across the board in Asia.
Remember the white knight supposedly to save the World, China, seems to have some problems of it’s own. Bernanke proved last night, he is willing to sacrifice stocks, so who will save us?
Some good points on where we are, how we got here, and what we could do to prevent a Depression. By Roubini;
The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008. The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?
First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well.
Full Reuters article here.
That Deja Vú all over again? Is Government about to shut down? By Bloomberg,
The U.S. House rejected a bill that includes $3.65 billion in aid to victims of Hurricane Irene and other natural disasters, a setback for Republican leaders controlling the chamber.
Some Republican lawmakers objected to the overall cost of the measure offered by their leaders. House Democrats opposed a spending cut in it. The vote against the bill was 230-195.
The dispute raises the specter of a government shutdown because the disaster assistance is attached to a measure needed to fund the government until Nov. 18. The current fiscal year ends Sept. 30, and Congress is in recess next week.
Further reading here.