Daily Speculations
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James Sogi
Philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family. |
8/9/2005
A Philosopher Looks at the Market, by James Sogi
Every theory or model we make relies on certain assumptions. Such basic assumptions as the correlation between our senses and realty form the basis for our models of the world. In the analogy of the cave, Plato described cave dwellers seeing shadows on the cave wall and pondered what did they know, what did they conclude. What was the relationship of what the cave dwellers conclude from the shadows to things outside the cave?
During a recent visit to the NYMEX trading floor arranged by a generous Spec during the recent bangup successfully and enjoyable Spec Party in NYC, it became clear how similar we screen traders are cave dwellers watching shadows.
When testing a theory or model, it is best to look at it points of failure to understand the limitations of the model. ignoring, smoothing, or otherwise transforming data to fit our assumptions is a recipe for erroneous conclusions and missing key revelations.
The action in the pit is the essence of the auction process and encompasses the stages of negotiation, bid, offer, and working out the meeting of the minds and results in changes to the price in the heat of the face to face action in the pit. After the deals are made, (sometimes broken) negotiated and recorded by the pit traders and brokers, the paper goes to the clerks and then to the official time and sales records which then are available for public view and data dissemination. However, the tale of the tape can differ in sequence, and time than the actual meeting of the minds, especially during chaotic opens, as the result of the normal auction and clerical processes. What may appear as a high volume cluster of orders, might in fact be a result of the back room processes or clerical functions rather than some "market" anomaly. Price moves may often reflect liquidity rather than supply and demand. This is a good example of the divergence between the "market" and the data.
The basis assumption of price and value or assumption that price is right and reflects the markets knowledge may not be a reliable conclusion, any more than the cave dwellers belief that the shadows accurately reflect the world outside the cave. Price may in fact be more often wrong than right and moves for reasons other than value more than the former assumption would justify.
As cave dwellers it is important to understand the structures of the markets before concluding that the shadows on our screens reflected the actual reality. This may avoid erroneous conclusions and missing key revelations.
c
Jim Sogi, May 2005
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