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On Market Streaking, And On HFTs Constantly Bidding Stocks Higher

Tyler Durden's picture




 

From Peter Tchir of TF Market Advisors

It is way too early on a Monday morning to be sick of hearing something, but I do think I might gag if I hear how unlikely 7 down weeks in a row are. 

I went back to the middle of 1987 and looked at how many weeks in a row the market has moved in one direction.  The longest streak, by far was 13 up weeks in a row.  That ended the week of Feb 18th 2011!  So from the end of November, we went up every single week in the S&P.  Of the 11 streaks that were 7 weeks in a row on the S&P, 2 have occured in the past 18 months, and 6 of the 11 have occurred in the past 4.5 years.  From June 1987 until October 2006, the S&P had experienced only 5 streaks that lasted 7 weeks or more.  Since October 2006, the market has experience 6 such streaks, including an unprecedented run of 13 weeks in a row.  Only 1 of those streaks was negative - back in the 1st quarter of 2001.  The % of time the market spends in a streak is growing longer as well. 

Maybe this apparent increase in the number and duration of streaks is a statistical anomaly, but maybe there is something more going on.  I haven't spent much time on it, but if the data is showing a real tendency towards more and longer streaks, what could be explaining it? 

More leverage and more use of stop losses by all investors?  If investors are using leverage and stop losses more than 'doubling down' you would expect streaks to last longer as you get a cascading effect of investors being stopped out. 

Has there been a meaningful increase in the activity of macro and/or trend based funds?  Has much of the market started following the same momentum or trend or charting strategies that they become self-fulfilling and last longer than in the past? 

Have the algo's or HFT programs helped push the market in one direction at a time?  In their attempt to 'earn' trading rebates from exchanges desperate to pump up volumes, do they employ strategies that purposely or inadvertently push the market in one direction?  Do they go through extended periods where the buy first then re-offers up a fraction of a cent to earn a little bid/offer in addition to the rebates?  Is it possible they adapt and have found revenues increase at times when they short first and buy back later?  The advent of HFT's seems to coincide with the phenomena of increased streaks, so maybe this should be examined in more detail. 

Sorry if this has added to the annoyance of listening to how long the market has run in a certain direction, but I did find this interesting, and so much talk of streaking makes me want to watch Old School again.                                                                                                     

Have a great week.

 

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Mon, 06/13/2011 - 08:14 | 1364377 augie
augie's picture

Peter Tchir, always Watching. Judging.

Mon, 06/13/2011 - 08:22 | 1364382 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Off topic...

... but there is a serious difference now between price of WTI and Brent. Worth an update article Tyler?

Mon, 06/13/2011 - 08:22 | 1364388 Tyler Durden
Tyler Durden's picture

Continues to be at a record. In January we expected this would be the case for a long time.

Mon, 06/13/2011 - 08:45 | 1364432 spanish inquisition
spanish inquisition's picture

Less people in the market and more machines that started with pennies of profit now looking for 1/100th of a cent. Time for someone to start designing algos to hunt inferior algos and exploit their flaws. Let the mathematician death matches begin!

Mon, 06/13/2011 - 09:03 | 1364478 oogs66
oogs66's picture

+1  like that battlebot tv show - though any algo's that can take the market down will be shut down by the SEC or be told by GS that they are too scary to be in the hands of anyone but them

Mon, 06/13/2011 - 09:04 | 1364477 Smiddywesson
Smiddywesson's picture

I wouldn't put all the blame on the HFT quants.  Market manipulation by the Treasury and the Fed is at an all time high, and I think that manipulation has a lot more influence on the eventual direction of the equities markets than the HFTs which are essentially direction neutral in their quest for fractions of a cent.  Maybe the variations in streaks is evidence that the powers that be have to use more lipstick on a bigger pig to create those streaks, because retail is sitting this out, and the manipulators are playing a game of diminishing returns.

Mon, 06/13/2011 - 09:10 | 1364487 Tense INDIAN
Tense INDIAN's picture

I thought Nadeem Walayat was very accurate in his prediction from April last year::

 

http://www.marketoracle.co.uk/Article28641.html

Mon, 06/13/2011 - 09:15 | 1364498 Fancy Bear
Fancy Bear's picture

It depends how many systems are holding overnight. If the vast majority close flat they won't drive weekly runs, and you'd see longer intraday runs and perhaps counter-trend movement into closes. Haven't done this type of research yet though.

Mon, 06/13/2011 - 09:17 | 1364508 CapTool
CapTool's picture

The problem usually starts when you start setting the position requirement for the algo. I want to go home with as little position as possible, but due to borrow rates being way over historical norms, and the fact that even if I want to run a stat arb type backbone to pricing I can't do a locate, and get enough shares, I pretty much start everything with bidding.  I just can't be short anymore, it adds to risk and expense. I miss the short rebate days, and being able to trust my clearing firm to find me stock, unlike now where if i am short for two days , oddly the rate goes up, and i start to get warnings that i am not compliant.

Mon, 06/13/2011 - 09:22 | 1364532 CapTool
CapTool's picture

The problem usually starts when you start setting the position requirement for the algo. I want to go home with as little position as possible, but due to borrow rates being way over historical norms, and the fact that even if I want to run a stat arb type backbone to pricing I can't do a locate, and get enough shares, I pretty much start everything with bidding.  I just can't be short anymore, it adds to risk and expense. I miss the short rebate days, and being able to trust my clearing firm to find me stock, unlike now where if i am short for two days , oddly the rate goes up, and i start to get warnings that i am not compliant.

Mon, 06/13/2011 - 09:28 | 1364550 DNB-sore
DNB-sore's picture

Tyler post regular updates of insider stock selling and this selling gives maybe an insight in how much confidence the insiders have in eachother. Concidering that ZH is revealing the truth about the market situation the smart money must have about the same ideas but the the show must go on and the shares can only be sold to people who still believe in the upgoing market. It's a steady pump and dump on the background. HFT together with upside propaganda makes a nice tool making this move possible.

Tyler, can you get data where the smart money (insiders of the inside) that has got pulled is going and who is buying the dumped stock?

Stock is looking more and more like subprime mortgages that look good until the truth gets out and a loss must be taken and that is not going to pretty.

 

Mon, 06/13/2011 - 10:08 | 1364630 PrDtR
PrDtR's picture

They seem to KNOWevery position I place.. EVERY TRADE goes to my stop then reverses.. NO MATTER HOW W-I-D-E it is!

EVERY TRADE LOSES!  THIS IS IMPOSSIBLE.. unless.. they see your cards!

I'm out of the game..

Mon, 06/13/2011 - 10:47 | 1364756 SAME AS IT EVER WAS
SAME AS IT EVER WAS's picture

Its like trading behind a two way mirror and your computer is the mirror. The media tries to sell the average joe an edge with TA and a fancy trading interface or some newsletter or even God forbid Cramer. I think you only need to know who and how many are short and who is long. Simple, good luck getting ahold of that information in a timely manner.

Mon, 06/13/2011 - 11:27 | 1364867 TideFighter
TideFighter's picture

"Anybody know if KFC is still open?"

Mon, 06/13/2011 - 11:37 | 1364886 Waterfallsparkles
Waterfallsparkles's picture

Just sick of the Market.  HFT, weekly Options and Option expiration every Friday.  Only ones making money are those who can trade for a tenth of a penny all day long thru their Computers.  The HFT's are the only ones that can make Money in this Market.  Everyone else is just a Host. Or, should I have said everyone else is Toast.

I have better things to do with my time than watching paint dry every day, day in and day out.

Mon, 06/13/2011 - 20:10 | 1366306 mickeyman
mickeyman's picture

It occurs to me that the Nanex crew has access to bid/ask data on a fractional second basis. One possibly fruitful approach to analyzing the high frequency algo problem is to use information theory. Clearly the bid/ask functions referenced in this post have very low info--the ones in the recent nat gas posts on zero hedge and nanex are a lot more interesting. It would be interesting to consider averaged mutual information between the bid and asks, as well as autocorrelations for both functions and entropy over particular windows of the bid/ask data streams.

It may even be possible to go over the predictive and successor states in an epsilon machine sense. Anyone up for this? I'm putting together a series of posts on information theoretic approaches to studying dynamic systems, but it will be a few days before they are up.

Tue, 06/14/2011 - 02:18 | 1367013 Mediocritas
Mediocritas's picture

IMO, HFT accentuates a trend / increases amplitude, due to the fact that, in effect, it REDUCES true liquidity. If what we have here is, as I think it is, traders disembarking the QE2 trade, then HFT will move the market a longer way down, just as it moved the market a longer way up. 

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