SPI200 futures & algorithmic trading?

[alwaysLearning]

I'm still reading widely at the moment and came across something interesting. The website URL is here:
http://www.camron.com.au/algorithm.htm

How much of this algorithmic trading is actually going on out there do you think? Is this website quote accurate?

What proportion of the SPI traders would be like us--sole traders(disclaimer:I don't trade yet), if you will? Are we a tiny tiny proportion of the number of conracts that get traded? (Which is what I would imagine to be the case but it doesn't hurt to gain confirmation).

My second question is, how accurate are thse depth of market indicators? I've read that brokers can manipulate the DOM such that the viewer gets a bluff or misrepresentation of if there is more buying then selling taking place or vice versa.

How widespread is algorithmic trading in all markets across the ASX?--Is this of concern to traders like us on ASF?

Here is a quote:

The SFE-SPI200 futures market is dominated by algorithmic trading systems.

The ability to recognise algorithmic activity is an essential skill for retail SPI200 traders.
During slow periods of intermitent activity, where the market maker simulates action with offset orders, filling the order book with spoof (tease) orders, a retail trader can execute an order, get filled, and 30 seconds later find themselves 8 points under water. In these modern electronic times the need for "small" retail traders to learn the art of tape-reading has increased, not decreased. It's essential.

The skill is the recognition of the market-maker on both sides of the order-book. Before the electronic market, "locals" performed the function of market-makers. They've been replaced by a single computer system which can populate, de-populate and re-populate the order book in a nano-second. Re-arranging the order-book instantly.

lone-wanderer
The lone-trader must be able to detect when the market-maker is the sole occupant of both sides of the order book ("market depth"). During this time the market-maker will know when they have filled a lone-wanderer, immediately withdrawing 10 levels from the order-book, pulling the rug out from underneath the lone-trader, testing their resolve.

If we were developing an electronic-algorithmic trading system, that's how it would be done.
See the screenshot below. We would know the total depth. We would know how many were ours.
If someone bought one off us at the front of the ask queue, we would pull our buy orders out, and sell 1 lot, 10 levels down, to see if the buyer had a stop entered.

 

[Timmy]

Great topic AL. I think TremblingHand is going to have more to say on this subject.

The level of activity of algo trading does vary across these electronic, screen-based, markets. Some markets have a lot more algo activity in them others. I don't know how the level of algo trading in the SPI compares with levels in other markets.

 

[MRC & Co]

Yes, definately a very interesting thread AL.

One thing I wonder, is how much these algo bots have changed the landscape of the environment. Do they make traditional patterns less effective, as some aspect of human emotion and crowd behaviour has now been taken out of the equation?

 

[Trembling Hand]

Great topic AL. I think TremblingHand is going to have more to say on this subject.

Yes i will as I drag my ar** off the sick bed.

How much of this algorithmic trading is actually going on out there do you think?

More than you think but its mostly just breaking up of large orders around VWAP rather than some evil empire manipulating the market.

Is this website quote accurate?

No. to fill the order book away from true value is just BS. Especially to try and capture a couple of small volume retail traders who may or may not turn up with piddly little 1 bit orders . If the BOT pushed the order book 8 points then the ASX market would move 8 points and that would be fair value. If the ASX didn't follow the BOT would be swamped by other Arb BOTs and if there was anything left the "Locals" will give it a nice push as well.

My second question is, how accurate are thse depth of market indicators? I've read that brokers can manipulate the DOM such that the viewer gets a bluff or misrepresentation of if there is more buying then selling taking place or vice versa.

Its not accurate at all. What counts is who is hitting the market & who is pulling orders. Its all just bluff and fill until it executes.

How widespread is algorithmic trading in all markets across the ASX?--Is this of concern to traders like us on ASF?

One thing I wonder, is how much these algo bots have changed the landscape of the environment. Do they make traditional patterns less effective, as some aspect of human emotion and crowd behaviour has now been taken out of the equation?

No. Most are arbitrage, VWAP or hedging. But with that said when they big ones get switched on the market moves, volume equates to volatility. There was, late last year, a very crude but effective SPI sell BOT running around the end of each month. Would instantanously stuff the order Book Ask side on any up tick and then push down in the last 10 sec of each min. after about 30 min all the locals see it and all hell breaks out . If its still out there its been refined a bit, not so easily picked up now.

 

[MRC & Co]

There was, late last year, a very crude but effective SPI sell BOT running around the end of each month. Would instantanously stuff the order Book Ask side on any up tick and then push down in the last 10 sec of each min. after about 30 min all the locals see it and all hell breaks out . If its still out there its been refined a bit, not so easily picked up now.

ha ha ha, funny story.

Yeh, a flu is going around, I've got a bit of it myself, but by the sounds of it, not as severly as you.



Here are some interesting stats from Wik:

A third of all EU and US stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based consulting firm Aite Group LLC. By 2010, that figure will reach 50 percent, according to Aite.[2]

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and equity markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006).[3] Futures and options markets are considered to be fairly easily integrated into algorithmic trading[4], with about 20% of options volume expected to be computer generated by 2010.[5] Bond markets are moving toward more access to algorithmic traders.[6]

Here is also a very interesting piece of information I thought:

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”

More sophisticated models and intelligent programs have created the question of whether the models will break down.

“The downside with these systems is their black box-ness,” Mr. Williams said. “Traders have intuitive senses of how the world works. But with these systems you pour in a bunch of numbers, and something comes out the other end, and it’s not always intuitive or clear why the black box latched onto certain data or relationships.”

Financial market news is now being formatted by firms such as Reuters, Dow Jones, Bloomberg, and Thomson Financial, to be read and traded on via algorithms.

“Computers are now being used to generate news stories about company earnings results or economic statistics as they are released. And this almost instantaneous information forms a direct feed into other computers which trade on the news.”

“There is a real interest in moving the process of interpreting news from the humans to the machines” says Kiristi Suutani, global business manager of algorithmic trading at Reuters. “More of our customers are finding ways to use news content to make money.”

 

[wayneL]

Attack of the Bots:

OK so I'm bored...so what!!

 

[Trembling Hand]

Attack of the Bots:

I see Merryl Lynch BOT is very much part of the Boys club.

 

[alwaysLearning]

Great information in here. Thanks for the responses everyone.

One other question.

Given that there is so much of this algorithmic trading going on--is that to our advantage or disadvantage?(ASF single traders)--these automated systems are essentially just mechanical based systems doing their thing.

I suppose logic would say that it wouldn't make much difference to us typically however if these big institutional traders use them more frequently then it could get tougher to predict when the big moves are taking place when analysing volume?

 

[Trembling Hand]

I suppose logic would say that it wouldn't make much difference to us typically however if these big institutional traders use them more frequently then it could get tougher to predict when the big moves are taking place when analysing volume?

Why? You carn't hide volume or price movements

 

[alwaysLearning]

Why? You carn't hide volume or price movements

I don't know. I have this crazy idea that these companies will be able to more easily offload contracts slowly (or buy slowly) over time so that the change in volume is less noticible.

It probably shouldn't make a difference, now that I think about it.

 

[Trembling Hand]

Just out of interest there is often a BOT that is helping the players push and pull where they want to go. Today there has been a sell BOT defending particular price levels. Filling the order book very quickly. The thing I carn't figure is why they make it so obvious. is it so punters like I can see and trade with it or its just a bit crude??

 

[macca]

Hi TH,

Maybe they are waiting for everyone to "jump on board" then they will move the bot level and cream everyone

 

[John S]

.


No. to fill the order book away from true value is just BS. Especially to try and capture a couple of small volume retail traders who may or may not turn up with piddly little 1 bit orders . If the BOT pushed the order book 8 points then the ASX market would move 8 points and that would be fair value. If the ASX didn't follow the BOT would be swamped by other Arb BOTs and if there was anything left the "Locals" will give it a nice push as well.

Hi THT,

I think the context was based around "slow periods of intermitent activity"


(a) between 9:50am and 10:10 am the cash isn't open and the SPI cant "follow" or be tied to the cash, and
(b) from 4:00 pm when the cash closes the SPI can't follow the cash, and
(c) during the night session, the cash isn't open, and cant folllow the cash
(d) lately because of the thinness of the market, single large orders are
"sweeping" the SPI (sometimes) 5 and 6 points away from "fair value" of the
cash.

Cheers
John

 

[Trembling Hand]

Yeah right!!

Between 9:50 and 10:10 as well as after 4:00 are the two highest volume times. Certainly not "slow periods of intermitent activity"

Still stands..... BS

 

[John S]

Yeah right!!

Between 9:50 and 10:10 as well as after 4:00 are the two highest volume times. Certainly not "slow periods of intermitent activity"

Still stands..... BS

The context of your statement is Non Sequitur, until the ASX starts trading what is there to "ARB"

 

[Trembling Hand]

Really?? You are trying to tell me that the times stated for the SPI are ""slow periods of intermittent activity". Please show me this slow period, PLEASE!!

That in the first 10 to 20 min of SPI trade when on avg 2000 contracts trade (about 10% of the volume for the day in minutes) that there are bots stuffing the order books faking out retail 1 lot traders??

This is the quote.

If we were developing an electronic-algorithmic trading system, that's how it would be done.
.........We would know the total depth. We would know how many were ours.
If someone bought one off us at the front of the ask queue, we would pull our buy orders out, and sell 1 lot, 10 levels down, to see if the buyer had a stop entered.

 

[camronsystems]

Let me clear the matter up .. The article was written from the perspective of a market-making algorithm. Often during the night session, when it's quiet, the market maker stands 10 points apart. The market-maker is the only one in the market. If someone hits the offer, the market-maker can and often does put the retail buyer 10 points under immediately by hitting 1 x lot of the bid queue (zero-profit trade) and withdrawing the remaining bid quantity down several levels. Happens frequently.

During the Day Session Levels 2 through 5 are usually occupied almost exclusively by the market-maker. Over the past year the use of aggressive market orders of 50+ x lots that lift or drop price during the first and last half hours has increased. A single sweep order of that size can lift price 5 points in one hit leaving a small 1 x lot trader stranded and under water 5 points in an instant. If two sweep trades are executed 1 after the other the small trader can be under 8 points easily. I'm not suggesting it's done to "get" the lone trader. That's just collateral damage.