Looking into price action and volatility recently from an instituitional perspective and what they believe lies ahead. Most of the downturn recently was actually expected for a while going back to Feb. Most instituitions were waiting for the right "catalyst to take it lower. Also, "perception" among retail traders made it slightly more difficult to take down to the "10% correction area" that has been deemed healthy. Therefore it was easier ( basically more profitable) to sell at the new highs, take it down 20-30 pts, then start bidding it back and driving it back up to new high areas. This never included the long term contracts they keep in reserve. Such as when the news was bad last July 06 (Israel in Lebanon and gas getting a tad pricey) And since "perception" was negative and 90% of retailers were looking for shorts the larger instituitions used their reserve of long term contracts to make new highs in 6-7 months and the retailers LOST their shorts (or soiled them) That was the easiest way for the instituitions to make money as a group. The long term contracts are now in play again and hare is how it works. Due to their large size instituitions are in the accumulation/distribution business. They always have contracts in play either long or short. They establish their position (this time 1560-1580 ) and accumulate shorts. At a given level ( look for a day that has a decent bounce to the upside after a sharp downturn) they will distribute 1/3 to 1/2 their position and wait to see what the rest of the group is doing. And of course hoping that the retailers are buying "value" All the while still using their allotment of weekly and daily cotracts to position themselves for the bigger move. If the market turns down again they will add to their shorts from stockpiled longterm contracts making an already profitable position "Crazy" profitable. The big firms new months ago that the subprime mess was going to unravel. They accumulate shorts, wait for news to hit the public, watch Cramer come unglued, and hire more accountants to tabulate dollars. The day the Fed first added liquidity in the afternoon I believe it was Bill Thomas who remarked that there was very few contracts showing on the price ladder of the dome. An excellent observation in that the instituitional and floor traders were using market orders since: 1. "Perception" had changed because the Fed was going to save the day 2. Most retailers were short because "this was the big one" 3. Didn't want to tip their hand using limits and stops. They then took a market that had been down 30 pts and drove it up 50 pts from the lows because once again that's where the easy money was to be made. In the process wiping out many retail traders large intra-day gains and in fact leaving a great majority with losses betting on the big one. On the "Rate" issue. What all big firms and instituitions have for their algorithmic trading programs is something they refer to as rate. Rate is the winning percentage of a trading program with volume for a given time period factored in. ALL programs have this feature. Overnight volume may be part of it, past 5 and 15 minutes is generally included. NOTE: This is usually utilized on their daytrading contract allotments. For weekly allotments they generally target specific areas. I.E. Their own handy-dandy Fib numbers. Recently, as volume has increased, they have dusted off some programs they haven't used in a long time. The "rate" was better, return on investment was better, the easier money was made that way. As of this writing, 8/23/07 , most if not all, big firms are in profit over 100 pts on long term contracts. Many are starting to probe the short side with add-ons. Weekly allotments are running near record highs from a profit standpoint. Daily allotments are now used more to move the market either up or down to a firms desired price pts where they can accumulate more shorts long term in the most efficient manner. Being profitable on daily daily allotments is not really a consideration right now. Those contracts are pawns in the bigger picture, a "loss leader" if you will. Notice that most of this is setting up for a downside tilt. This last wave of selling over the past month was too much panic selling and an "everyone for himself mentality" This is not what the instituitional players want because: 1. It's harder to trade and gauge the the market 2. Put a price on "value" and what really is the publics perception. 3. Firms that get left behind because they weren't capitalized well enough to get as big a piece of the pie as they wanted and therefore might "break rank" and not assume their role in the pecking order for the next leg of the journey. Consensus among the big firms is that this subprime mess is actually looking to be a larger underlying problem than Long Term Capital Management in the late 90's. Note: since we are all daytraders here this focus is on the functions in the instituitional players futures divisions. Obviously, their stock portions will get spanked if this heads lower but that is not my concern. My only concern is what directly affects us on a day to day basis, mainly the e-minis. For the next phase of this journey I would expect a little more orderly move. Not without volatility or devoid of the big move mind you, but more days like this week when the market rattles around in 2-3 pt swings and collecting most retailers entries and stops before meandering on it's way in whatever direction. These may be some difficult times to trade for a bit. Walk softly and carry a BIG stick.