I don't think the micropicture will tell you what you want to know. it would be a bit like looking at the butterfly to predict what the hurricane will do. that's just my opinion. maybe you'll find something interesting.
Good question alpha, one with no clear answer but many interesting tangents. I agree w/ vulture that institutions mean more to this market than ever before. Joe Blow either bit the dust or became inconsequential a long time ago. Here's a scenario i have wondered about: just for kicks, let's say that all the benchmark boys (idiot mutual fund managers) were fired for lousy performance, and all their cash went into passive index funds like Vanguard. Imagine, if you will, a market where over 90% of transactions by volume were essentially related to passive indexing, with the majority of buys and sells each day predicated solely on investor capital flowing in or out of passive funds. In an effort to mimic the measure, the measure is itself affected. The S&P 500 essentially winds up chasing its own tail, so to speak. To some degree this is already happening, thanks to the homogenous nature of large cap mutual fund holdings and the moronic autopilot groupthink that is second nature to the street. But what happens if the process intensifies, as I submit that it will if/when passive indexing gains even more of an edge over active management as the big mutuals burn out? The more that investors try to be good little students of Burton Malkiel and do the sensible thing by going passive, the more their one-sided actions end up creating massive feedback loops that result in potentially greater volatility than before. So thanks to passive indexing, maybe instead of the boring sideways markets of the dead seventies, the 00's will give us more wild ascents and gut wrenching declines.
Your poll question seems to presume that daytraders always or even very frequently wait until the last couple minutes and all go flat at once.
Fri Oct 25, Volume cleared S&P 64,196 Volume cleared ES 628,869 64,196 x 5 = 320,980 ES equivalent Just the little guys huh? Stand in any pit or on any exchange floor and see what number everyone is watching all day, the ES.
I stand by the last statistic I saw...Average es trade size...1.5 contracts. Who are these big guys trading es? My guess is the largest players in es are moving about 10 to 12 million (250 contracts times underlying value approx 45,000) and that is small potatoes. Do you know of anyone with an average trade size larger than 250? Know anyone trading 1000 lots? How does es compare to US or German bonds? But here's one I'll give you, try this, type in es volume 628,869 then times that by 500 shares and see what your calculator does.
As a follow-up to Darkhorse's theory of passive index investing and its implications, I found the following editorial by Fleckenstein: http://moneycentral.msn.com/content/P32406.asp
I agree w/ Fleckenstein and read his stuff daily- he is brutally hard on active managers, and with good reason. Their cavalier attitude towards risk is both shocking and disgusting. Recently readers have been writing Fleck to ask where they should put their money if they don't have time to manage it themselves. He's promised a response over the coming weeks, and I am very curious to hear his answer simply because from what I can see there is no easy answer. Decisions that stem from willed ignorance and lean towards packaged solutions- the "I don't have time or interest" factor- seem fraught w/ risk no matter what. Random walkers' solution to active management incompetence is to go index- but how much better is that, really? Fees are lower and diversification ("de-worse-ification") is better than it is with a beta ripper at the helm, but the same debilitating effects apply in smaller doses. i.e. when you are on the same side of the boat as everyone else, the boat (eventually) gets rocked to your detriment via simple physics. "No free lunch" as a law of financial thermodynamics? p.s. alpha i apologize if this line of thought is going in an undesired direction for the thread
<b>Micropicture: Keep an eye on small potatoes?</b> <b><i>tntneo said:</i> I don't think the micropicture will tell you what you want to know."</b> Maybe not, although that is an important result in itself. In crafting a good trading system, knowing what to ignore is as important as knowing what to focus on. If I can ignore the micropicture, that's the best news I've heard this month. My interest in the micropicture was in understanding whether and how daytrading (by small and large participants alike) has an impact on the the daily OHLC price bars that I watch EOD. As I saw it, daytrading had the potential to push for higher highs (if day traders are net long) or push for lower lows (if day traders are net short). I also wondered about the extent that the closing price is corrupted by day traders going flat (e.g., the so called short covering bounce on the close that profitseer mentioned). These effects would impact the interpretation of indicators and trendlines. Everyone recommends having a deeper understanding of the markets -- creating systems based on a grounded theory rather than ad hoc patterns. Everyone talks about the universal impact of fear and greed on traders (and the exploitation of those emotion biases by more successful traders). Yet that implies understanding who has the emotion bias and how it impacts trading. Already, I can tell that fear/greed are very different in a single-entry market (e.g., stocks) vs. a double-entry market (e.g., futures). Having two participants with equal and opposite P&L has some interesting effects. <b><i>KymerFye said:</i> Your poll question seems to presume that daytraders always or even very frequently wait until the last couple minutes and all go flat at once"</b> Yes and no. You are right that the effects I speak of will be strongest if all day traders concentrate their entries to the first few minutes, hold through out the day, and then exit all together in the last few minutes. But the effects remain even if the entries and exits are more broadly distributed or if daytraders make several round trips in a day. What I am wondering about is the overall impact of daytrading capital as it flows from cash (at the beginning of the day) into the market during the day and then back into cash at night. I wonder what that total capital is? <b>Funky Fund Fundamentals: dumb smart money</b> <b><i>darkhorse said:</i> thanks to the homogenous nature of large cap mutual fund holdings and the moronic autopilot groupthink that is second nature to the street...."</b> YIPEEE! I love moronic groupthink because it creates profitable patterns. The key is to realize how institutions and program trading create a special kind of market efficiency. With so many players having the same motivations and the tools to pursue those motivations, the market will look efficient with respect to those motivations. The result is a utility-efficient market for these players. But that does NOT imply that the market is price-efficient. The existence of "must-own" stocks (e.g., index components), "can't-own" stocks (e.g., perhaps Tyco), and loss perversion (losing is OK if we all lose together) create price-inefficiencies in the market. A stock can have positive expected future utility for a groupthink fund manager (great window dressing for the portfolio) and have a negative expected future price return (deteriorating fundamentals or technicals). I'll never forget one fund manager's defense of another fund manager's ownership of a large position in Enron -- "but he HAD to keep his position because Enron was in the energy index." LOL! Asymmetries in utility models create profit opportunities for individual traders that don't need to justify their holdings to anyone or stay with the herd-annointed "safe" choices. <b><i>darkhorse said:</i> Imagine, if you will, a market where over 90% of transactions by volume were essentially related to passive indexing, with the majority of buys and sells each day predicated solely on investor capital flowing in or out of passive funds."</b> The retail investor strikes again! This scenario is more than a little scary for traders because of the issue of fund manager's privileged access to deposits and redemptions. Companies like Fidelity are doing a great deal to model and predict customer behavior -- creating more accurate models of inflow, outflow, account closures, etc. Given their privileged access to this data and the market-moving impact that darkhorse speaks of, I would say that the fund managers have de facto inside information. Under darkhorse's scenario, redemptions and deposits become "material" information because they have the power to move the stock price as much as any company announcement might. <b><i>vulture said:</i> With hedge funds attracting enormous speculative capital, mutual funds liquidating many of their core holdings"</b> Fortunately, I think vulture is right, I suspect that the move to passive index investing has reversed recently. Index funds have had horrible returns of late, so more people are looking for actively managed funds and hedge funds. (Of course, Fidelity owns these funds too, so they still have inside information about up-coming market-moving capital flows.) Anybody got any data on whether individual investors are moving their money into funds vs. stocks (I know about data on the large flows from stock funds to bond funds, but not data about flows between funds and individual equities.) I suspect that one of the drivers behind the index fund vs. hedge fund battle is investor's loss aversion. When the markets are going up, nobody wants to risk a substandard return so they opt for passive investing. When the tide is rising, people just sit contentedly in their boats. When the markets are going down, people become much more willing to take risks and invest in hedge funds. When the tide is falling, everyone flails around desperately. <b>Reuniting the Thread:</b> <b><i>darkhorse said:</i> "p.s. alpha i apologize if this line of thought is going in an undesired direction for the thread"</b> Please don't apologize because my ultimate goal is to understand the markets (daytrader capital flows are just a piece of the puzzle). And, if institutions are playing a bigger role in price dynamics, then that is what I really need to understand and model. Moreover, I wonder if some hedge funds are essentially "daytraders" -- using ultradynamic short-term trading strategies. Perhaps we can merge the subtopics of day trader counterparties and those odious fund managers by looking at when fund managers prefer to trade. Clearly, most fund managers hold long positions for longer timeframes (they don't usually day trade). And if manager's predilections for buying and selling are not perfectly distributed between morning and afternoon, then these managers will impact intraday dynamics. For example, if fund managers are more likely to sell in the afternoon (to generate cash for redemptions) and buy in the morning (to create new positions based on overnight news), then they will tend to create order imbalances on an intraday timeframe. I have some guesses on this issue, but would love to hear from those more knowledgeable in the mysterious ways of fund managers. Lets keep this very interesting discussion going. Trade well everyone, Traden4Alpha