Nothing’s Changed – October 14, 2011

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[B][I]“The pros visualize what they can lose and how painful that will be, whereas the amateur sees only the opportunity and the joys of winning.” [/I][/B]Michael Martin - [url]http://www.huffingtonpost.com/willow-bay/michael-martins-inner-voice_b_1007831.html[/url]

No edges, no positions and multi-pivots paths of least resistance still strongly biased to the downside for both IWM and GDX. But ATR is dropping fast, encouraging risk appetite and bulls to open new long positions.
Billy

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Billy,

This is an interesting chart (at least to me). Do you have some insight as to the use of opex pivot levels? I assume it has to do with market makers generally wanting to minimize their own risk by pinning indexes at certain levels, but not sure.

We've discussed how looking at outstanding contract expirations can indicate where option market makers will likely take prices at expiration. I'm curious whether opex pivot level work somehow works well in tandem with this.

Anyway, be interested in your (and others) thoughts

[url]http://chart.ly/6j6carw[/url]

[QUOTE=adam ali;17687]Billy,

This is an interesting chart (at least to me). Do you have some insight as to the use of opex pivot levels? I assume it has to do with market makers generally wanting to minimize their own risk by pinning indexes at certain levels, but not sure.

We've discussed how looking at outstanding contract expirations can indicate where option market makers will likely take prices at expiration. I'm curious whether opex pivot level work somehow works well in tandem with this.

Anyway, be interested in your (and others) thoughts

[url]http://chart.ly/6j6carw[/url][/QUOTE]

Adam,
What is the definition of opex pivot levels?
You wrote previously that you can't update your own normal floor levels for SPY. How will you use exotic opex pivots for SPY?
Billy

SPY updated floor levels - it wasn't that I couldn't. It was that I was interested in your analysis of those levels.

Opex pivot levels - have no idea. That's why I thought I'd raise the question, to see if you or others were familiar with the concept.

[QUOTE=adam ali;17697]SPY updated floor levels - it wasn't that I couldn't. It was that I was interested in your analysis of those levels.

Opex pivot levels - have no idea. That's why I thought I'd raise the question, to see if you or others were familiar with the concept.[/QUOTE]

The calculations are from opex to opex rather than fixed periods like weekly or monthly.
The power of floor pivots is that they are widely used by market makers and floor traders algorithms.
In this context, opex pivots are sounding like another distractory gadget to me. They seem to be very marginally used by professionals if by any.
I'm of course open to hear feedback and backtesting from any member using them.
Billy

Billy, is there anything else widely used by professionals that we or common crowd don't really know about?

I mean you, with your experience should really write a book about it, and I bet it would be a best-seller, but I understand that it's too much to ask for...

So far, we've come to learn from you about pivots, floor levels, VWAP, TICK....


Thanks for you work!

[QUOTE=Andrei;17703]Billy, is there anything else widely used by professionals that we or common crowd don't really know about?

I mean you, with your experience should really write a book about it, and I bet it would be a best-seller, but I understand that it's too much to ask for...

So far, we've come to learn from you about pivots, floor levels, VWAP, TICK....


Thanks for you work![/QUOTE]

Andrei,
My last professional experience as a market maker dates back in 1996 or 15 years ago. I have been an independent trader since then.
At the time, there were no ETFs, no algorithms, no HFT, no decimalization and backdoor (hidden to the public) professional electronic markets were only marginally active and allowed overnight. We were not even using charts, only spreadsheets with our inventory levels and P&L for each timeframe.
Most of the time was spent by the staff on the phone, interacting with large institutional clients for initiating and optimizing real-time buy & sell opportunities. If a client wanted to buy, we didn’t trigger an optimal buy program for x million shares like they do today, but we managed at best the Level II book. Bid & ask were a minimum of 6.25 cents apart on large cap stocks but most often 12.50 cents for IPO’s and small caps stocks! It was really hard to hide your position and intentions back in those days…
So, it was all a matter of progressively scaling in and out from one floor level to another both for our own inventory and for the clients. Recent backtesting has proved that it was still the best strategy if you had the market direction right. We always had the market direction right for us based on our clients’ supply and demand. If they were net buyers of 1 million shares and we had 500,000 shares in inventory, we could always sell them those shares to avoid risk and buy the remainder in the market without any risk for ourselves if the market was plunging. As market makers of individual companies stocks, we also often had privileged information directly from insiders.
Today, I am like everybody else and I try to find the highest probability trades. I just keep my multi-pivot methodology as the foundation of my trading setups and risk management, since backtesting proves it remains the best effective approach, most likely because that’s also what today’s algorithms are using. Not my methodology which is an “aggregate compromise”, but multi-timeframes pivots and floor levels are clearly in the professional programs for optimizing the management of their own positions.
What has changed is that I can only guess the most probable market direction since I don’t know the large players’ net position anymore. For a mechanical trading system, nothing beats the guidance from the 20 DMF and its best ST/LT strategies. That’s how the robots were born. For discretionary trading, especially for the risk management of leveraged positions, I found VWAP and Cum TICK logics most helpful, but it is still not quantified, I have to interpret them qualitatively. And these tools were found long after I became an independent trader.
Another very important parameter clearly used by programs today is volatility and that was also important for our position-sizing as market makers. The lower the ATR, the bigger size positions we were ready to risk. The robots have also included the optimal use of ATR from backtesting.
So, I would say that only multi-pivots and ATR expertise are still helpful today from my past professional market maker experience. VWAP and cum TICK came long after and I adopted them for discretionary trading because they are 100% rational with monitoring HFTs and program trading. Surely, some other tool will emerge over time but I am not aware of it now.
Billy

Thanks for such concise and informative answer, Billy.

From what you write and from what I've read in other places, I conclude that computer and algorithmic trading is still very much in its childhood since it started to develop 10-15 years ago (I hope I'm not mistaken). This is kind of scary, because once quantitative analysis becomes ubiquitous as I think it will be in another 5-10 years, the same information will be spread among all market participants, and honestly I don't know how this affects trading.
Anyway, it's always a pleasure to learn from an experienced trader such as you.