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Word on the Street: Effect of High Frequency Trading

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Some of this week's most insightful and timely vibes.

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All day, everyday some of the stock market's best and brightest traders and money managers share their trading ideas, insights and analysis in real-time on Minyanville's Buzz & Banter. Here's a recap of some of the best buzzes from this week ranging from James Anderson's timely discussion of high frequency trading to Quint Tatro's timely trade of EDR. We thought it would be worth it to review, and for those Minyans not yet Buzz & Banter subscribers, click here for a free trial.

Monday August 3rd, 2009
Professor James Anderson

High Frequency Trading
(HFT), which is the use of computer models to enter trades, has received a considerable amount of attention in the blog space as well as the financial press. There are number different styles of HFT, but the most important part is the speed at which these trades are entered and executed.

The fastest possible computers are located adjacent to the computers that receive orders at the stock exchanges, and I when I say adjacent, it's not the building next door, it's literally feet away. This world operates in milliseconds, and even the speed of light in a fiberoptic cable is not fast enough for anything other than colocation.

I don't want to go into the argument for and against HFT, but I want to show you what it looks like. The attached table and chart are the New York Stock Exchange Tick Indicator. Tick is defined in the following manner. If a stock trades up from its last trade, that is a positive tick. Down, it would be a negative tick. The Tick Indicator simply sums up all the positive and negative ticks on all the NYSE stocks and reports that number every 10 seconds. (At least my software reports it every 10 seconds.)

The table includes all reported ticks from 10:00 to 10:06 this morning. The column on the right is the difference from the tick reported 10 seconds earlier. The chart is the difference column. As you can see in this 7 minute period, the tick swings wildly back and forth from a high of 580 to a low of -318. Remember, those are 10 second swings.

Folks, It's not people doing this. This is HFT at work. Is it just noise? Does it really matter? Obviously it matters to the people doing it because they are extracting profits from somebody. Who that somebody is, I am not sure, but with the very sour attitude toward Wall Street on Main Street, I can't imagine that Congress will not want to investigate. If you haven't heard of HFT before, you will in the future.


Click here to enlarge.


Professor Ryan Krueger

Now I know what a real Ford (F) Fiesta feels like (I never got a ride in Hoofy N' Boo Writer Justin Rohrlich's). But I'd hasten to add another chart not being drooled over like letter F's to provide a clue down a different path, just in case that cash for clunkers continues to devalue.


Click to enlarge

Look at the chart of Palladium since December. Palladium is used in catalytic converters to remove more than 90% of harmful emissions from automobile engines.

Ford driven? Hardly. While the U.S. makes up coupons and I.O.U.'s to beg consumers to spend after their last discretionary dollar is gone, I found it much more intriguing to watch an even larger democracy spending some of their first discretionary rupees.

The first Tata Motors (TTM) Nano was recently delivered at a cost of $2,053 USD. The Chairman himself handed over the keys and wished many other like the buyer well "...who will be buying their first car."

How many 'firsts' might there be? There are more children under the driving age of 18 in India than the entire population of every age in the U.S.

*Professor Krueger had positions in F, TTM, and Palladium at the time this buzz published.

Tuesday August 4th, 2009

Professor Quint Tatro

It doesn't matter what you think, it's what the price action says. For some time I have been talking about the technical beauty of iShares Dow Jones Real Estate ETF (IYR) going so far in a Tape Talk to relay to listeners that if they couldn't accept the technical pattern because of its business model, they should instead pretend it is a toy manufacturer. The simple truth is, even bulls I know are bearish on real estate, which means squeeze fest and what you are seeing today.

I enjoyed a bit of the IYR ride, but exited yesterday pocketing a decent gain. Yes, I too tried my hand at the old SRS short, but that was long ago and I sure as heck didn't fight that battle long. I am now looking to squeeze 'em with the rest of the boys and have entered Education Realty Trust (EDR) which looks to be attempting a decent trend line break going back to January. With a stop on a break of today's low, the risk reward is exactly what I am looking for on a day like today.

Wednesday, August 5th, 2009

Professor Branden Rife

For those wondering why the big rip in the big banks and PMI players, it is because of the comments Radian Group (RDN) made on their conference call this morning. The company said it saw a significant decrease in early default activity in 2009 vintage mortgage business because of improved underwriting. Improved underwriting… imagine that! It also said its 2008 book is showing a turn (a.k.a. not having to pay out as much insurance for foreclosures). This shouldn't be too much of a surprise because its worst exposure was in 2005 through early 2008 subprime. That has already been flushed down the toilet. Hence their benefiting from improved underwriting.

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No positions in stocks mentioned.

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