VNIf ever there were an indirect proof of my theory of the ecology of markets providing a proper dissimilitude and distribution of wealth from the bottom to the top, including the members, it's provided by the plethora of 20 point or more ranges in S&P day in and day out, on more than 75% of occasions last year, with the moves being triggered by seasonally adjusted random numbers from the past month about this or that contrary indicator, or this or that self justifying and self serving utterance.






Speak your mind

6 Comments so far

  1. Bob Johnson on August 2, 2008 12:48 pm

    Vic and Laurel, I implore, the reason why S&P point changes instead of percentage changes are used in your contributions to Daily Spec?

  2. vic niederhoffer on August 2, 2008 4:41 pm

    The reason is that the algebraic changes preserve the actual P/L made and are consistent with continuously adjusted prices that actually happened. The ecology of markets is sufficient within a given margin to make the algebraic changes, the actual amount you make and lose, stay relatively constant as they have during the past 10 years when the drift has been zero, etc., etc. v

  3. Anatoly Veltman on August 4, 2008 1:39 am

    Commitment of Traders (C.O.T.) data, released by CFTC around Friday's close, broadly confirmed most of our suspicions. Commercial players duly took advantage of relatively better prices in most markets - except they notably failed to bid in liquid Energies and Stock Indexes, and also failed to offer against Treasury rally!

    In Metals: Commercials duly bid under the falling contracts - thus decreasing future downside momentum. Copper's commitments remain most bullish, featuring solitary Commercial Net Long!

    In Energies: mild Bearish divergence in CL and HO, where drops to new summer lows did not find Commercial bid! Slightly better in RBOB. Significantly more Bullish in NG, where new lows were made on new record LargeSpec Net Short and against significant Commercial Long!

    In Treasuries: Bullish divergence, where price move up has not met Commercial offer - and significant Commercial buying across maturities instead, save for 5y!

    In Currencies: lower prices found substantial Commercial bidding in all currencies - indicating upward struggle for any further $ gains.

    In Stock Indexes: upward price move toward Fib retracement targets was met by further Commercial Net Shorting! Spec Longs remain vulnerable.

  4. Anatoly Veltman on August 5, 2008 9:29 am

    Following the worst month for commodities in 35 years (I haven’t checked that - but I’ll take CNBC’s word for it), we experienced somewhat of a Black Monday! Early Tuesday, as $ got stronger again - CL bottomed at 118.00, NG at 8.335, PL at $1530. All of the above are relatively attractive values, achieved on combination of right and wrong factors. All of these are happening on rapidly reduced Open Interest, accompanied by rumors of mega hedge fund going under! These are typical set-ups for reversals “of consequence” - and we have to be very alert not to miss best values.

    With individual commodity reversals - there will be quick and sharp pullbacks from 91.50 AUD/USD and 1.0450 USD/CAD. This is the easy part. More intricate play involves European currencies. EUR will be supported as the result of any commodity bounce - but prime factor for it remain Central Bank announcements this week. Of those, Thursday’s BOE is expected to be the most damaging. And then: US stocks performance is the biggest wild-card! While I’m not outright buyer yet, the daily chart pattern mirrors some of the explosive rallies (I recall 1991’s especially vividly). Pointedly, one of newsletter industry’s Gurus went Short stocks this morning - first time in a long time!

  5. Anatoly Veltman on August 6, 2008 12:12 am

    This is what I was referring to Tue morning, when I said "daily chart pattern mirrors some of the explosive rallies (I recall 1991’s especially vividly)":

    daily chart on the right is of SPH92 futures as traded mid-December 1991. Knocked into 38% retracement area twice; then gapped over it! A week later SP flew over the 50% retracement, and never looked back.

    Daily chart posture going into Tue trading was sporting the same coiling upward formation, getting ready to spring and storm 38% barrier - just as hapless trend-oriented Specs were assuming aggressive Shorts! A prominent newsletter quipped:
    "We may have voiced modestly supportive notions for stocks in the past, but yesterday's "action" has us convinced that we are to be a seller of stocks rather than a buyer, and so we shall do so this morning, selling the Dow futures, or the SP futures, or the NASDAQ futures… or all three in tandem."
    To me, that was an indication of (finally) considerable bearishness on behalf of the Specs - something we likely to see reflected (for the first time this summer) in the next Commitment of Traders report…

  6. douglas roberts dimick on August 6, 2008 10:13 am

    Douglas Roberts Dimick, J.D.

    Foreign Expert
    Technology and Economics
    Certified, Hubei Province, PRC
    AmShell Ltd.

    Horsetracks or market exchanges, I am reminded here of my early statement of theory research, developing my “quantitative relativity” for SMART, concerning benchmarks…

    On March 30, 2006, I moved to China for two reasons. Primary was to complete coding of SMART (securities market automated relativity trading). Secondary was to research and identify locations for hedge fund formation — hence the current book project of the past two years, titled Foreign Capital Investment Banking for China.

    During my first year here, I taught each of the three (primary, undergraduate, graduate) levels to learn about Chinese thinking regarding business and social order. In this past year, I have taught one two-month corporate and two three-week test training seminars, all with my Dao Ge (or Doug) English, which I developed based on my limited study of Shaolin.

    For pictures during my two years in China:

    Meanwhile, while coding SMART, I also met a black box contractor from London now living here in Wuhan, China. He had married a Chinese girl and then moved the family and his business here. Smart guy… I learned loads during one meeting with him.

    His discussion about devising state machines for regulating energy systems operating among diversely located commercial buildings got me thinking about relative implied volatility arbitrage, specifically benchmarking.

    In the design of my “quantitative relativity” methodology for SMART, I have focused on integrating varied applications (e.g., equities, indexes, options, futures, commodities, and Forex) for strategy design and engineering of stochastic indicators and functions.

    To simplify this discussion, just think of corresponding inter- and intra-relationships between the studies of math and law. The issue: which “ought” — thus a philosophical query — to govern architecture and engineering during the course of constructing and operating program trading systems?

    On New Years Eve 2001 at Palm Beach Polo and Country Club, a high-frequency trader suggested I look into formation of a hedge fund. One month later, I met another local trader (dual masters in mathematics and finance) who posited that the Theory of Relativity applied to electronic market exchange systems. We collaborated for six months and then parted, irrevocably conflicted concerning (a) the utility of “batching” and (b) application of indexing for parallel modeling of variable integration for indicator and function architecture.

    COMMENT: Both of these issues touched upon a subsequent study, Relative Implied Volatility Arbitrage and Joint-Efficiency of Index Options Markets. Based on FTSE and DAX equity option index markets, “abnormal returns” (similar to those of mine with batching and indexing) appeared with “contemporaneous trading volume and lagged returns.”

    Design of a simple no-arbitrage barrier to identify significant mispricings may determine statistical arbitrage trades. However, “benchmark issues for modeling escape may escape mathematical quantification.” For instance, as with my indexing research, the referenced study found that “two options markets are not jointly efficient with implications for multivariate risk estimation and volatility spillover.”

    During R&D on SMART and as a “rules based” architect of program trading, I limited my mathematical analysis here to the conclusions of then contemporary research: see Ammann, Manuel and Herriger, Silvan, Relative Implied Volatility Arbitrage with Index Options (May 2001); University of St. Gallen, Department of Economics.

    The “math” of benchmarking for option arbitrage (e.g., Black-Scholes) appeared to me (then and now) synonymous with my early modeling conclusions about batching and index-based parallel indicators. To wit: “delta is not a linear function of the underlying price given delta-curvilinear properties,”… thus traders having to re-hedge for a delta-neutral strategy (or gamma trading). Also see Javaheri, Alireza, Inside Volatility Arbitrage, The Secrets of Skewness (2005).

    As a result, econometric models (for math purposes) “must simplify market assumptions that are not true in practice.” Example: “market prices are continuous and delta adjustments can be continuous and distributed in lognormal fashion”; actually, markets gap, particularly during periods of market stress, thereby skewing delta adjustments.

    My conclusion — then and now? I recently read that a noted arb-academic was quoted to confess… “At present, I don’t know of any good benchmarks.”

    Therefore, if mathematical quantification only reshapes (or reformulates) the issue (or parameters for delta [benchmark], theta [decay], and gamma [rent] computations), then deduction indicates that a resolution may be found in the physics (or laws) of those market anomalies which preclude or skew the modeling of market efficiencies (and inefficiencies).

    With this analysis and distinguishing, I designed and am now coding SMART based on this formulation of “quantitative relativity,” whereby benchmarking is replaced by doctrinal states governing present-past output generation as opposed to past-present-future quantifications.

    Only a JD among a panoply of PhD’s, I posit that my “quantitative relativity” methodology presents a rules-based paradigm that may provide an ecological (i.e., balancing) influence among the “quant” dominated program trading establishment.

    As I grew up on a horse farm in Maine, and having played a little bit of polo over the years, I learned that, although there are two sides of a horse, emphasis is on not taking a position at the wrong end at the wrong time. We might consider this analogy given issues attendant with efforts to benchmark (or shall I say “setting the odds” for) world electronic market exchanges.



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