......this just arrived in the mail and is a very enjoyable,...

......this just arrived in the mail and is a very enjoyable, insightful read from a team that trade on the Chicago floor

http://mrtopstep.com/2011/09/welcome-to-t3-3qtr-end/

Market Commentary, The Opening Print|September 28, 2011 6:43 am
WELCOME to T+3 & 3QTR END

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OUR VIEW:

WHERE HAS ALL MY MONEY GONE?

When you start counting up your trading losses you have to take into account the commission you pay and the fact that most good algo rhythm trading systems don’t have loosing days/weeks/months or years. With futures trading being a zero sum game it’s safe to assume with (lets be nice) that 60% to 70% of the volume coming from some form of program/algo trading. If 60% to 70% of the volume is 100% right where is all that money coming from and better yet where is going? When we mentioned T+3 being an end of the quarter terminator we forgot to mention the all incoming algo programs. The algos have no heart and it does not care if you can’t pay your bills. You turn it on in the morning and you can turn it off at night. It does not care about anything but profits.

Back in the early 90s the PIT BULL was one of the most out spoken professional traders in the world saying that program trading would someday ruin the game. He even considered taking out a $1mil, full page add in the Wall Street Journal condemning the practice saying it was not real trading and that it would eventually “kill the game”. Some algo trading system is on auto and can flip a short position into a long position. Additionally the systems tend to zero in on the large areas of buy and sell stops like they did yesterday in the CLX and the ESZ. Once in motion the algos help carry the markets in a specific direction and in most cases will move sharply with little or no pull backs. This is what causes so much of the losses. Example; hedge fund A is net long stocks and thinks the markets are going to sell off. The fund can figure out the exact dollar amount of the stock they own against the exact amount of S&P futures they need to sell. They sell the futures to lower the downside risk but they also have to deal with marks and they don’t need S&P futures any more when the markets start going up again. It works the same way with calls. The trader is long IBM; he sells IBM calls to protect and for a few days the markets sells off. When the markets start to rally the trader has to buy back the calls or let them expire. Once the markets start to move the other way in come big waves of index arb buy programs and the also latch right on to it. It’s a vicious cycle that does damage in almost everything we trade. So where do this leave us? Where it leaves us is in this kind of “risk on / risk off” type trade. After every big sell off and rally the losses pile up and more customers disappear. In the end it means when they look like they are really going to kill the market you better be buying and when they look their best you better be willing to sell. In the new world order the main rule is to “Get in, get out, don’t fall in love with your position”