Tuesday, May 22, 2007

Schizophrenic Since 2-27-2007

Jamie Hodge submits his thoughts in response to recent observations on the high degree of vacillation in the markets:

This vacillation is the product of:

  1. Thin markets (i.e., low liquidity)
  2. Algorithmic market making

Here are some facts and observations:

The market has been quite schizophrenic since 2-27-2007 and is still terribly over done. How many months now without a 10% correction? We are in the longest period without one.

Everything's out of whack for old school thinkers like me - people that make a few trades a day, they won't even notice.

Take a look at the smooth action in the S&P before 2-27 and then after. The market is extremely thin with average transaction size being 400 shares on the NYSE these days.

Figure 1.0: Pre 2-27-2007

One possible explanation:

What happened on 2-27-2007? They pushed the STOP button pure and simple -the system operators weren't even supposed to put trading curbs in until the Dow was down 1200 points. The NYSE simply pushed the stop button - a do over - whatever you want to call it. Then they blamed it on a 'network problem'. Hmmmm.

Figure 2.0: Post 2-27-2007

As far as strategies go, I have many that are working – unfortunately most of them are designed for automation.


We'll get him to share some of these shortly. In the meantime here's a strategy-related post about 2-27-2007:


James said...

Hey Jamie,

Are you saying the NYSE just tried to shut off everything to prevent a further decline? I'm trying to make better sense of your post. thanks


D TradeIdeas said...

I believe that before you use to be able see what the specialist was quoting and get a decent sense of what was going on. Now the specialist is much like an ECN. Showing very little and acting more like the way market makers and ECN's act on Nasdaq.

The idea is that it is much harder to read the tape the way old school traders are use to doing it, which is why it is so important to go algorithmic and be able to spot some opportunity the moment it is there cause it may not be there much longer.

Dan Mirkin
Senior Managing Partner
Trade Ideas LLC

Anonymous said...

I think that before 2-27 the NYSE had been focusing it's efforts on defending it's turf instead of making sure that it was a liquid,fair and orderly market.(Let's not forget transparent)

To answer your question, yes, I think they got caught with their pants down.
That's just my humble opinion though. I could be wrong.