Market Manipulation and Technical Perspectives

[Eric Johnson]

Was reading some interesting info on high frequency trading and the ability of not only funds to move the market, and the idea of adjusting tick bias by the market makers. We have some brilliant writers on this forum. Just wanted to open a thread on perspectives on market manipulation.
Here is what I had for inquiries. I noticed when trading the S+P that at critical technical decision points there would be extreme volume spikes. Do you believe in the "plunge protection team"? What are you seeing for unusual activity? I have held the opinion that the US markets have been propped up by fiat (printed) low interest money, for political reasons like passing health care.
So for me I got tired of my options on the index being disrupted by market changing announcements and things like short selling bans. I switched to forex, where the large volume over rides some of the shock of large fund injections. Have others changed their trading style, or technical tools to accommodate these possibilities? Do you consider trading to be more difficult now, or technicals less useful?
How about scalping versus swing trading? For me I want to scalp and get in and out before they make the next surprising game changing announcement or close more banks over the weekend.
Feel free to post any upcoming changes that may give a heads up on changing market technicals or fundamentals. Something like a change in capital gains tax rates, could effect technicals with lower volume, skewing some indicators.
Anyhow the point of the thread is to be more aware of what is moving the markets and tools being used to stay profitable in these historic times.

[DugDug]

This potentially could be a very inflammatory thread.... might be interesting watching the "we are all doomed club"

My two cents....

Markets may be influenced over the short term by people ticking instruments, but over the long term they will do what they want, no matter what anyone does. Its the self correcting nature of the beast. So it depends on your trading time frame.... longer term has less effect. However it definitely appears that over the last 30 years, increased volatility has increased whipsaws - see long term trend trading returns, and market comments on this strategy - the continually adjusting players here have done better than the old school ones. There will always be trends, bubbles and crashes.

I dont think technicals have changed over the long term, its just that nothing works all the time, and you need to be flexible enough in how you view certain patterns/indicators/price action in the context of the market.

Clearly the largest change of recent years has been via technology, direct market access (DMA), increased leverage, increased volumes, narrowed spreads,more traders (retail and institutional). My point of view is that this has actually made the markets more transparent, more liquid and more open to increased players - all a good thing.
Clearly people have changed their styles - high frequency trading, day trading - previously tough for most to do on the floors. Even market makers have changed their styles. Global risk books are more the norm than individuals running a book. Lets not forget that bucket shops have always been around - Jesse Livermore, Dutch tulip trading...

..........
things to watch out for....

Pressure on reducing leverage - not a bad thing, so long as its not demonised, but I always thing anything over 25 times is asking for trouble.

Taxation - this affects returns (as its only after tax returns we should be concerned with), it appears that the world is slowly moving toward a global taxation system - trying to get rid of the tax havens and regulatory arbitrage. Ultimately this will not stop people from wanting to make money, I doubt this will make much affect in the behaviour of daily traders - more so investors.

Regulation - this is the elephant in the room....really no idea, as the regulators seem to have no real idea either...... however ultimately the big players are all regulated anyway, they will find ways around most things eg; setting up elsewhere, calling prop trading market making- Bernie Maddoff does not count as he never actually traded!

China/India - China - well.....its still a communist country, people forget that but Watch the volumes explode in these countries over the years.

See first comment - the market will do what it wants anyway...

I am currently trying to amend my trading styles to incorporate more short term trading.
learn adapt survive.

[BlowFish]

I think it's a common mis conception that high frequency traders move markets a large part of their volume is arbitrage. This ensures correlated markets are not mis priced their actions do not increase volatility. High frequency traders are de facto market makers, competition between them narrows spreads increases liquidity and is an all round good thing.

Flash trades are a different matter but if they have any sense the SEC will ban them (which they are considering apparently)

If you read something like reminiscences of a stock operator you can see the players have changed but the game remains the same. If you want to learn about the game in detail a good book on market microstructure would serve you well.

[DugDug]

Hi BF - I always wondered about the rise in high frequency trading, and if the majority of their trades are arbitrage/market making OR if they are actually trying to scalp and trade direction, I figured most were arb guys, selling Russian bonds to hedge against Indonesian Palm Oil.

Definitely a lot of quant trading can move markets - especially when they all go one way and when they look to all get out at the same time.... whoops.

So I guess they can be seen as influencing market moves rather than manipulating them. What about initiating market moves?

[BlowFish]

On the whole arbs make money on there hedge portfolio returning to parity. The question is how out of lines things need to get before you trigger. Other arbs will be competing.

I am not sure anyone 'initates moves' per se. (I guess MP terminology could encourage this way of thinking of things with initiating/responsive categories). Traders tend to work orders to get positioned without moving the markets. Sure there are more sophisticated instruments and al sorts of tools nowadays but I think the game. You mention quants, well they simply use mathematical models to detect disparity in pricing, it's just another form of information asymmetry with a particular characteristic.

[DugDug]

I always find what moves the market interesting - not from a fundamental point of view, but how people react, and people ticking things. It comes from my days as a market maker. but I have never been a conspiracy theorist of sorts.

This may boil down to definitions.....
In this discussion I would separate the quants, the arbs and the market makers a little....just as a matter of definition - totally up for debate of course. was LTCM a quant or an arb player?

Mainly with the quants actually taking positions - not just trying to detect disparity in pricing (ideas of value v current price, relative values etc) , but also they were/are also BIG momentum quants. These definitely moved markets in Aug 2007 - the buyers disappeared and the quants all had the same positions on.... they forgot about liquidity.
So was it the buyers who by disappearing manipulated the markets?
Its a bit like blaming the lawyers for the global financial collapse by helping design the contracts, that allowed/encouraged the leverage.
I dont know.

[BlowFish]

[QUOTE=DugDug;88782

This may boil down to definitions.....
In this discussion I would separate the quants, the arbs and the market makers a little....just as a matter of definition - totally up for debate of course. was LTCM a quant or an arb player?

.[/QUOTE]

I rather like Harris' definitions (categorisation really) of market participants,why they trade and how they trade. Seems comprehensive to me.

Personally I don't see ' a quant' as a type of participant. I see it/them as a technique of analysis rather than a type of participant in its own right. So Arbs might use quantative techniques (and almost certainly do). Dealers trading other peoples order flow might use quantative techniques (almost certainly do to measure performance if not to actually trade). etc. etc.

[Eric Johnson]

Interesting ideas for sure. I was trading corn futures when it went electronic a few years ago. The daily ranges went wild, and it seemed to trade mirroring the stock market, more than the underlying value of a bushel of corn. It blew my normal technicals out of the water, going limit up for almost 3 sessions.

I am noting the disconnect of underlying asset value, and the power of speculative binges. Something like we saw in the price of oil. Then there is the question of what kind of measurable forces would bring about this kind of swing. Is there predicable times (like announcements) when technicals are dramatically altered?
For instance I was trading the S&P when it hit it's lows of 666. Form this point should I have predicted that there would be such a V bottom? Was there really so many people sure that the underlying value of the S&P assets were worth so much more the very next day? I am asking kind of out there questions for the following point. I wonder if it was some kind of plunge protection triggered, or just normal market technicals for a rebound. And I do not think that the companies were worth that much more the next day, but the index sure acted like it. Actually we did predict the bottom technically, but expected a test of the lows, maybe even a nice pullback to go long on.
So on a mirco scale it is interesting to see how limited or unlimited the effects could be of high volume trades at key points or formation decision points. I guess it depends how much money a large player has to risk to attempt to steer the market.
Finally I really value what the guys are discussing. I have always been interested in things like, how is the high and low of a day determined? Think about it, there must be a few market orders that get filled at absurd prices. There has to be a filter for what counts. That has a great bearing on my technicals. Enough for now, so glad this is not an online gaming forum, I would have to go to nerds anonymous for enjoying these conversations.

[Eric Johnson]

I wonder if others have observed this aspect of revised historical charts. I was trading the Nasdaq around Feb of '09. I was trying out a opening gap close trade. I took a small QQQQ option, and even had the futures feed to watch it 24 hours a day. The gap was never even near closed on the minute charts, but all sites like Yahoo and daily historical back fills showed the high and lows with a closed gap.

This is the idea that those who control the past history color the future, especially if they could shape technicals. Like I posted before, who controls what exact tick that reflects open, high, low, close? Could the formations like head and shoulders be sculpted to suck in dumb money then reverse? Also I have seen different price levels for the historical highs of the S+P, varying around 20 points.

To something more concrete. The statistical shaping of the past and market directing. Here is one of my favorite sites reporting the major upcoming revision of the way unemployment numbers will be accounted, coming up 2/5/10, yes Friday.

Mish's Global Economic Trend Analysis: 824,000 Will Disappear On February 5; BLS Admits Flawed Model But Plans No Changes

I do not know if it will matter to the markets. It does show the ways that stats are manipulated and things like the GDP figures are of suspect and constantly revised.

Of course there are an unlimited number of factors that drive the markets. This has directed my system building to focus on technical high probability scalps. I look for things like times when the markets are acting fairly normally, the 24 hour forex markets offer many hours when the markets are just coasting along. Then I look to isolate technical setups that may not be huge pip runs, and may only happen a few times a day, but are in the 80-90% probability of being effective trades. I would love to be a relaxed swing trader of day bars, but the stream of market directors has gotten so fast moving and hard to predict. Like when is an announcement out of China going to shake the markets? Never mind the meddling regulators and weekly game changers. Why would I want to bet my money on what the team of Bernake, Obama, and Geitner will spring on the markets next?

[DugDug]

Revised numbers - this has always been the case....I find it crazy, but that is why if looking at fundamental numbers you either need to look at the trend for those numbers - to make longer term fundamental decisions, or really focus on the expectations of those numbers, factor in the context of the market moves and trade off expectation v actual numbers on the days....there are some big global macro guys I know who combine both pretty well over the long term. But once they got whacked 15% in a month by a Swiss inflation number that caught everybody out....in the final analysis it was shoes that caused the issue and in the revised numbers, the shoes were taken out of the equation.... too late the market had moved and they were stopped out.
It seems you either need to be short short term and avoid the numbers, or longer term where the numbers make less impact....in between can hurt.

Re historical data.... this is a tough one for a retail trader. Some big quant houses collect their own data, I heard one of them spends $2mill a year collecting and storing. For the rest of us we have to make do. Thats why I have done some simple testing (I am not a programmer), whereby I use it to test the overall idea, the parameters that tweak the system and make sure that the numbers are reasonable.... however I never believe my numbers because I dont believe the data is real.....hence why real time paper trading something is vital with real data live time - not just walk through trading of historical data.
Overall I still dont think the technicals change that much, its just that some of the simpler patterns/ideas work in some markets better than others.....eg; any mean reversion system or support based system is more likely to fail, or not look good in a sustained downtrend. Its still all about context.