Why the S&P E-Mini Stinks

[Why the S&P E-Mini Stinks]

Bobcollett: Run a 1 min chart with volume histo at the bottom, and go back for 5 days or so and watch for the 8K+ spikes in vol. You will start to see a pattern to the number of minutes between trades and the location in the movement of the index. Rarely moves in a large candle , hard charging sequence, often picks quieter times when it looks like nothing is going on. Only happens on good vol days +500k near the open min. It's the "art" part of trading, not hard to learn, takes a little practice. There's an algo running, I've not taken the time to try to figure it out, by the time goofs like me get close, they will change it. It appears to be a volume related algo.

[Why the S&P E-Mini Stinks]

Colocation of servers, not just in Chicago, but actually within the exchange buildings, is standard procedure amongst the HFTs. This has nothing to do with any kind of exchange corruption, per se, or 'high level people at the CME', but simply the priorities and resources of the HFT firms.

 

 

HFT firms operate most extensively in individual stocks, where the superior speed of execution has largely usurped traditional market-making. When they do operate within futures markets such as the @ES, it's largely in the mode of arbitrageur, hedging off a position against a basket of underlying stocks (or a similar contract such as the SPY).

 

The HFT firms, as the name suggests, employ 'high frequency' strategies, and seldom hold positions for more than a few seconds. Their trading models are incredibly sophisticated and are very far removed from anything that you (or I) are likely to be using. In this sense, their demands are unlikely to intersect with yours, the retail trader. So although they might want to have an order filled at a particular price that is the same as yours, it's not because they're going through the same trade decision making process as you, but then somehow getting in there faster.

 

Worrying about the actions and effect of high frequency trading is a bit like an athlete about to run a marathon worrying whether certain celular metabolic processes will take place efficiently within his body. HFT occurs on a 'microscopic' level far beneath that of day traders (and that's whether you trade momentum, volatility, reversion to the mean . . . anything), and apart from the fact that it makes contracts highly liquid it can be ignored. To look at it from a different point of view, do you really think that the big trend-following funds, who hold positions for many months or even years, are interested in what a daytrader is doing to affect the market at any particular time, or fretting over the few ticks of slippage that result?

 

Thank you for your thoughts, much appreciated ! Here are a few more of mine.

Some of the directors of the CME are owners of those HFT outfits, so I see a bit of a conflict there, which I will try to address. I do not think or mean to imply corruption, simply an advantage that a retail trader should be aware of, especially scalpers.

I completely agree with your remarks about the HFT, hedgers etc not caring about retail traders, and never meant to imply that they did, quite the opposite, they are just doing their thing, and we can inadvertently get taken for a ride in the wrong direction. Anyone with an unfiltered feed can see HFT's operating all day long in the ES contract. You will see the volume spikes that really stand out, and the most obvious thing to me, is the equal number of buys and sells. They occur regularly and without fail. A daytrader trying to make ticks in an around one of these events is going to have trouble getting fills, would they not? I trade off a 5 min, but use a 1 min for entries and exits, and am very cautious about placing an order when expecting another HFT volume spike. I have evolved my trading to working a longer time frame and larger moves in contracts like the ES, going for parts of the 10 pt moves that happen once or twice a day, and the more obvious 3-4 pters that come up.

More dramatic examples are seen in gas and oil trading, where speed is essential for good fills and the server location is a big advantage. Again I'm not implying corruption, just stating that there are advantages that even owning a seat cannot overcome, if you aren't very well financed to acquire the hardware etc to get the fills you think you should get looking at the DOM.

I am very curious how the role of arbitageur could explain the equal number of buys and sells in these volume spikes ? Does anyone know about this? If they are in and out quickly where is the arbitrage in a trade like that?

Thanks for the input!

[Why the S&P E-Mini Stinks]

Yes !! Agreed, 100 %

If you stand in the ES pit at the CME you can see the locals trading the spread, watching the S&P quotes on the screen. The big brokerages do the same for their big customers with their runners in the pits working the diff. Many is the screen trader that thought he got his stop run, by what was really a bunch locals working the spread.

[Why the S&P E-Mini Stinks]

Thanks for the links, these will help a lot in explaining how the different contracts fill.

I know people who lease and from what I can gather they get the same speeds we do, because their data is still fed through the same servers we use, if we were at the same broker as they use. I've seen them test speeds before trading when using their laptops on the road. They are leasing to reduce brokerage costs, but still have many of the same issues we do, and still pay exchange fees.

I've heard many times that some of the HFT's are owned by high level people at the CME and that have co-located servers in Chicago, that helps them get the speeds and fills that they do. I would imagine that some seat owners would also have their data servers, if they owned their own, located at close as possible to the exchange as well. It a fairly complex web of information to grasp, I would guess, and one tries to understand the routing that is used by say a brokerage buying stocks for their corporate account vs a small retail trader trying to execute over a filtered data feed on an ancient platform, delivered to a market maker ( stocks) offered by many of the larger investment firms. This is an extreme example meant to show the range of processing that is available out there, and the minefield a trader stumbles through in learning the business.

Does this makes sense to anyone on this thread?

Thanks for the inputs.

[Why the S&P E-Mini Stinks]

The matching algorithm is chosen by the platform provider, is it not? e.g. NT uses FIFO

[Why 200 MA?]

My understanding is the 200MA is quite relevant on a 1 Min chart, as well as on a daily chart. I believe this is so because many big professional traders use it, and it therefore supports the self fulfilling prophecy as described above. I have watched the indexes , currencies etc bounce around at the 200 for many years, it does not stop the move, can be a reversal point, but it most cases becomes support or resistance after a move through. Simply plot it on a 1 min chart and go back through a trading day, it's easy to see. I don't know about stocks, ETF's etc, but would imagine a daily 200MA would show some pressure on the price as it neared.

The 200MA on a 1 min is an area I watch carefully in my trading, often exiting at it, and then re-entering in the move beyond or on the bounce. My experience is that the price will move through this area easily, only IF there is significant momentum, i.e high volume and the big boys are moving the market.

[I'm Done...]

I'd like to add a couple of comments to I'm done as well. The road to successful trading involves a complex mix of skills and tools, none of which are apparent at the start. The best advice I ever got was don't quit yer day job, till you are profitable on a monthly basis, and can remove cash flow from you business and build your account.

There are several ingredients which have become important to me over the years. The first as is well articulated in this forum is learning to trade and I would add, trade a system that makes sense to you AND you understand. This means you must strive to learn what the indicators are and what they are telling you and in what sense, i.e. lagging, leading etc. traders must understand charting.

I strongly believe it takes a while for traders to discover which instrument they are suited to trading, and this can make a world of difference to see a chart build over the day in something the trader feels comfortable with. Great money can be made in high speed oil and slow mundane bonds, and everything in between.

The best traders I've met all said " Don't Ever Give Up". This does not mean trading for a living when you can't afford to, but keep up your learning and skill set, you just haven't found the right training and tools.

Build you library, there a dozen books at the top of the list" Every Trader Should Have" . They don't cost a lot, collect books that interest you and keep going. You can "trade" stocks in a retirement account, use sim accounts or any other avenue as suggested by other posts in your thread.

Stopping trading and losing your grip on the need to make money and turning your focus to being a good trader will help immensely in turning the corner. Going back to a 9-5 might hurt a bit, and be a hidden gem that propels you forward, and perhaps gives your kids a chance a growing up in a trading family, a platform for them to be financially secure for the rest of their lives and never have to worry about finding secure income or being stuck in a job they hate.

Best Wishes

[Trading Tip #13: How to Pick Intraday Market Direction – the 80% Rule]

here's my 2 cents; The 80% value area is actually from the calculation for a 1% standard deviation, which is part of the Market Profile research that dates back to the 1970's. One standard deviation will give you 68% , that is then rounded out to 70, and then here has been rounded out to 80 because instruments like the E mini run up past the 68% much of the time before a retracement.

There is a world of useful and very helpful information on market profile out there, and much of the latest work I've seen has eclipsed the original guys like Steidlmeyer, Dalton et al. There are guys in Europe producing fabulous chart indicators, and customizing them for the idiosyncracies of the various instruments.

The Dude gave I thought, some insightful comments, you can't mechanically trade volume or price weighted averages ( market profile is done in both ) without as the originators said, ( eg Tom Alexander) taking into account the wider view of the market. Today is a terrific example in the Euro. In my experience most of the professional traders use some sort of Volume or price weighted moving average to assess the markets, over the short, long and everywhere in between periods. Picture this: one could create a chart based on the various session periods that each instrument trades in, the European, overnight, US Asian etc and get different results on the deviation.

Hope this helps.

[[MP] Trading with Market Profile]

I'm new here and just wanted to say thanks to ant; his post 1 up, could be a classic overview of Market Profile interpretation, if that is possible. Not viewing it is as a trading system, but rather one of market structure and development, used as a map of information resting in the background, while you use your indicator system for entries and exits.

Looking forward to involvement with the community.