Oct

18

One of intelligent honest things that Livermore did was to get out of one market by selling a related market, inducing the other traders to think that there was weakness in one market which would carry over to the related market. The art of indirection and letting people use their own intelligence and inferences to come to their own conclusion. for example if he wanted to get out of cotton, he'd sell some coffee. If he wanted to get out of a common, he's sell the preferred or a related company that owned a big chunk of it, like sell Christiana which owned general motors et al. This technique one wonders how often is it used today. When it happens, is it artful indirection or chance? How to quantify and what predictions to be made? Would the robots be smart enough to do this?

Anatoly Veltman writes:

There was a moment in late 80s Energy trading, when legend has it that a great admirer of Livermore who runs a venerable hedge fund near New York was Bearish to the tune of 40,000 lots. If you think it's not much, just remember that Exchange limit for open speculative position in any contract was 6,000. Of course, his positions were in all possible inter-month spreads and across products. So once decision to cover was made, he picked up the phone and asked for the cockiest trader in the Crude pit. "Are you a man or mouse?" Trader thought it was a prank: "Come on Paul, what do you want?" "I'll give an order to sell 1,000 market, and I mean worst. But if I don't see Crude print through even– they're all yours! Do you accept?" 

Tim Melvin comments:

Smart enough? Its one of the key concepts the black box guys I have spoken to use every day? I am not a programmer, nor do I play one on TV but it seems to me that a good one could set that up in short order…. 

Jeff Watson comments:

One technique still used today on a limited basis is to buy or sell a large order in a single batch and see how the market digests it. A trader can glean a lot of information about direction by seeing if his bid or offer is gobbled up or many of the same order comes out of the woodwork. This method worked great when the pits were active, and still works somewhat in the computer age. 


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2 Comments so far

  1. Matthew on October 18, 2010 2:45 pm

    The flash crash on May 6, 2010 comes to mind when thinking about Mr. Vic’s query.

    Nanex has a theory.

    http://www.nanex.net/FlashCrashFinal/FlashCrashAnalysis_Theory.html

  2. andre wallin on October 19, 2010 7:25 pm

    I understand how in a market like we have now 90% lose , 5 even, and 5 make the rest. However, when you are in a tech bubble, gold bubble, etc. Do 90% make money on the way up, 5% even, 5% lose? In ES day trading for example: the level of expertise to be profitable over a week, month, year is much higher than most could imagine upon trying. However, this statistic is not completely accurate and it should come with the “it depends” stamp. Outright statements should not exist unless it is math. Also, why are we trained to make statements without saying “i think”. This is loved by academia because they are all about ego. They say “don’t say I think because you are saying it so obviously you think it”. However, it is critical that people communicating with each other EMPHASIZE their uncertainty. Humans take language at face value. How much would this change CNBC and financial news in general. This BS has got to change as people are being misled of the facts constantly.

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