camron systems camron.systems.australia     section 12 of 26

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futures trading - supplementary notes

 page contents - topics covered
boolean logic
combinations
compensating errors
electronic universes        
flight to safety
giffen behaviour
 		iceberg orders
illusions
insider trading
insurance
jobbing volume
lock-step effect        
manhattan natives
million different ways
permutations
squeeze the premium      
statistics
stochastic games
 		stochastic motion
stochastic transitions
stochastic uncertainty
untouchables
westcoasters


jobbing = scalping

Observation indicates nearly 40% of daily SPI volume is "jobbing volume". In other words, brokers having a "hit up" keeping the ball warm, the crowd entertained. The illusion of activity.

what is jobbing.
source www.bank-banque-canada.ca
Dealers-Brokers have a variety of advantages in bearing risk. Reciprocal agreements among dealers to post bid and ask prices guarantee these market-makers access to liquidity. Customers, or non-market-making participants, do not have this access. Braas and Bralver (1990) found that financial intermediaries can make economic profits solely by jobbing, or by buying and selling continuously in small increments and providing liquidity to the market. Furthermore, financial institutions have a higher tolerance for risk than their customers.

ie. scalping by a different name, on a larger scale.

unintended consequences.   see law of unintended consequences in a trading context.
The notion profits can be made by jobbing, ie ticking price up or down is appealing. Nothing wrong with that. It creates liquidity which in turn provides other participants opportunities to enter or exit positions they may not otherwise have. When done in moderation. An unintended consequence of this "liquidity" function arises when actioned aggressively by the simultaneous use of iceberg and skyscraper orders described below.



a million different ways to trade - a lifetime to try them all

possibilities - understand the permutations

Dreamtime. Some necessary context. The international card game of bridge, each of 4 players receives 13 cards from a deck of 52. The chance of any player receiving the same combination of 13 cards again is 1 in 635,013,559,600. see for yourself at http://mathworld.wolfram.com/Bridge.html The ASX50 accounts for 80% of the capital value of the ASX200. Thus the bulk of movement in the spi comes from the ASX50. View the ASX50 as a deck of 50 cards, with 4 sectors (suits) finance, manufacturing, resource, services-property-retail. Any one company can move the index up or down 1 point. The combined price changes of 1 sector can change the index 10 points. The probabilities of the same group of companies repeating the same price changes at the same time is about the same as above 1 in 635 billion. If watching a live chart of the SPI you are seeing something that will never happen again in your lifetime. Interesting statistics. Freely available in other disciplines. Anyone know of any comparable studies of the ASX200?. Having developed over 200 programs analysing the spi, we can say in any year no 2 days are the same. The philosopher heraclitus said you can't step into the same river twice .. by the time you step in the second time the water has changed. parmenides said you cant step into the same river once, its changing as you enter. I went through a thousand rivers before I got waist deep ...


and they constantly change
Conceptualise the spi future as a compound. The periodic table with elements with a fixed atomic weight is the core of chemistry. Chemical compounds can be reduced to their component elements. An element is the smallest unit. The SPI is not a fixed body that can be reduced to individual elements of fixed weights. It is a notional 'thing' indirectly represented by another 'thing' whose location and state constantly changes. A state determined by multiple factors, each of which is determined by its own set of factors. This is best demonstrated by brownian motion, defined by Einstein as .. random bombardment of a particle by many smaller particles .. Modern theory calls it a stochastic process.
spinner brownian
examples of real-time stochastic - brownian motion can be seen at
brownian motion
brownian stochastic 1
brownian stochastic 2
gamma stochastic 3
 		at   http://galileo.phys.virginia.edu/classes/109N/more_stuff/Applets/brownian/brownian.html
at   http://www.ms.uky.edu/~mai/java/stat/brmo.html
at   www.stat.umn.edu/~charlie/Stoch/brown.html
at   www.stat.umn.edu/~charlie/Stoch/gamma.html

compare eliosoff-posse occams razor logic pattern at http://cgm.cs.mcgill.ca/~soss/cs644/projects/jacob

Following on from this, the SPI can be conceptualised two ways. as (a) a constant sized particle whose location is constantly changed by the bombardment of surrounding particles, or (b) a body of particles whose location and constituent number within the mass are constantly changing.

another million different ways - coming-ready-or-not
The number of possibilities is a two-sided coin. Each side is a distinct universe. One occupied by the trader using a semi-fixed (known) set of tools producing one permutation. The second is occupied by the index itself, constantly changing in response to an indeterminate number of coming-ready-or-not influences, creating another set of dynamic permutations. The combined effect of both sets of permutations together reduces the chance of the current state being 'equivalent' to a previous state, to those of "International Bridge" ie 1-in-635 billion.

An example of one side of this very trap : This headline statement from STI-mpfx technical at www.stideas.com/Technical%20Analysis.htm says it all. "No indicator is 100% accurate, but using several at the same time may eliminate many False signals".
An interesting statement. Think carefully about it and you will see the dilemmas. It says .. (a) a single indicator cannot work. (b) one indicator in isolation creates false signals (c) Indicators used in tandem, may, just may, eliminate false signals. May not too. (d) caveat emptor (e) no guarantees here.


boolean logic

compensating errors
Take an activity comprising one simple process. If it works, assume there are no errors. If it doesnt work, isolate the error. Take 2 simple working processes and combine them together to form a compound activity. If it works you can't assume there are no errors. There could be two compensating errors within the compound process that allow it to work. There could be 4, 6 or 8 compensating errors. How do you test for them. And that is the problem with false signals. Does the second indicator 'eliminate' or merely compensate the first. How many latent errors are there. The greater the number of components the potential compensating errors grows exponentially. A filter never fixes an error. Simple as that.

A two and three component test using boolean logic.

  OR statement
""
AND statement
""
XOR statement
NOT statement
 TRUE or FALSE
TRUE or FALSE or TRUE
TRUE and FALSE
TRUE and FALSE and TRUE
TRUE xor FALSE
TRUE NOT FALSE
 =     TRUE
=     TRUE
=     FALSE
=     FALSE
=     TRUE
=     TRUE

boolean logic
Named after the nineteenth-century mathematician George Boole, Boolean logic is a form of algebra in which values are reduced to either TRUE or FALSE. Boolean logic is especially important for computer science because it fits within the binary numbering system, in which each bit has a value of either 1 or 0. Another way of looking at it is that each bit has a value of either TRUE or FALSE. Boole first defined them as part of a system of logic as an attempt to use algebraic techniques to deal with expressions in propositional calculus. Boolean algebras find many applications in electronic systems




iceberg orders

An iceberg order is a telltale sign of a large order(s). An alert for the lone-trader. Don't ignore them, take advantage of them.

Iceberg orders are large orders with only the peak of the order publicly visible. The largest part is invisible. The peak is introduced into the order book. As the visible volume fills and while a hidden volume remains, a new peak appears .. etc .. see automatic electronic replenishment of scaled orders.

source www.investopedia.com
A large single order that has been divided into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity. When large participants, such as institutional investors, need to buy and sell large quantities, they divide their large orders into smaller parts so John.Q.Public sees only a small portion of the order at any time -- just as the "tip of the iceberg" is the only visible portion of a huge mass of ice. By hiding its size, iceberg orders reduce price movements caused by substantial changes in supply and demand. ie normal market response to the appearance of large volume is for price to immediately retreat.

Conversely, opposing skyscraper orders can be used to stack the order queue with large "visible" orders to hold price while the iceberg orders are being filled at a better price. It's sheep dogs penning sheep in a sheep pen. The skyscraper orders are the pen and the iceberg orders are the sheep dogs.
see how this works in "sharks, sheepdogs and termites"

An aggressive use of these features. A series of large visible orders are placed 5 points apart either side of the market and fanning out 5 points above and below those points. That creates the pen. Then with an aggressive attack from one side of the market drives unsuspecting traders into the waiting "visible" orders at the edge of the pen. As soon as the orders have been filled the attack ceases, releasing the pressure, and prices immediately retreat back to the other other side of the pen. One large scale individual trader known as Rolls.Royce is known to trade this way. As the saying goes, in sport, the side that wins is usually the one that makes its own luck. Another group known as the "cabal" act in concert on a larger scale to attack with a fast market in the direction of the move. Pick up half their positions during the early part of the move, then when filled place their large iceberg orders 10 points away, then attack in the direction of the move with the other half. Like pushing a boulder over a cliff.



skyscraper orders

The term Skyscraper Order was originated by Camron Systems in 2005 to signify an order that is unusually large.
The opposite of an iceberg order.
They're highly visible. Easy to see. Everyone can see them.
More important is to be able to "see" and recognise iceberg orders.



illusion

The art of deception.
At the outset in section2 it is stated trading is an intensive visual activity. The dominant theme of the site is the recognition of the importance of where to look, what to look at, how to look, how to see, what to see. How ten people see things differently. This item brings together under one heading the topics within the site that touch on the subject of illusion.

natural - unintentional
Colour illusion
Graphics illusion
gestalt principle of proximity
gestalt principle of continuity
attention blindness the gorilla puzzle

artificial - man-made - intentional
Fragmentation
iceberg orders
market depth
order splitting
order scaling
auto order replenishment
jobbing volume activity
stealth trading

illusion - examples

Color Coding
Some trading platforms use colour coding to display course of sales (time and sales). Green for price change higher, red for price change lower. Subsequent same-price trades are uncoloured white.on.black. Prices changes are in colour, all other activity is uncoloured. Attention is drawn away from the norm, with focus on the exception. However, price may change on one lot, with heavy activity among the following same-price trades. It is important to confirm the price change is supported by both subsequent bid-ask action and same-price trades. It is equally important to determine if subsequent same-price trades are 'buys' or 'sells'. An example is seen in the course of sales snapshot where price changes frequently, alternately hitting the bid and ask, while bid-ask stands still. A price change is only confirmed when the bid-offer prices also change, together with hitters hitting, in the same direction as the price change.

Fragmentation
Data reporting by fragmentation breeds the number of trades seen by 3 to 1. May lead you to believe more action is happening compared to reality.

illusion 1 www.langara.bc.ca/psychology/colour2.htm
illusion 2 SFE activity explosion of ticks
illusion 3 SFE true trade size not reported - fractionated / fragmented
illusion 4 Metastock RT tick changes only on price change - same problem as classic OBV



squeezing the premium

Squeezing the Premium or Expanding the Discount
Just another source of mispricing. If toward the close, having traded at a normal premium all day, the spi closes at or near cash, or even below cash. The premium between the spi and cash has been "squeezed" out. Generally a squeeze does not occur on positive days. ie cash is up. A squeeze will occur under three conditions.


After that, it then all depends on what actually happens to the S&P500 and the Dow in NY
If overnight, S&P500 was in fact neutral to positive and the ADR's were up a medium 6+ points the premium will be restored during the open of the day session. The night session never recovers it. That is a job left for the day time market. The over-night SPI will merely track Globex point for point. However if the ADR's are up particularly strongly 15+ points due to say BHP and/or the dollar and/or gold then some anticipation of recovery of the premium will have occurred. Not all of it.



spatial

spatial dimensions

parallel time dimensions in electronic markets
Markets operate on two separate planes (dimensions), simultaneously, side by side.
Futures trading involves the combination of two distinct markets. That's 4 separate planes.

conceptual .. but .. There are two co-existing markets. Futures and underlying Cash. Each market exists in two parallel time dimensions. NB: not time frames. (a) Market Depth, what is planned, is an intra-spatial before-image, and (b) course of sales, or time and sales, what has transpired, is an intra-spatial after-image. Both happen simultaneously. Two markets give four parallel spatial universes. To examine just one universe, requires spatial awareness. To relate two together requires inter-spatial awareness.

A price chart is an intra-spatial after-image, or expired time frame inside the "after" time dimension. Examine the image of four aligned universes - above right - and consider .. The constituency of market depth pre-trade universe constantly changes, without expanding, while the constituency of the expired sales universe after-image does not change, it's universe constantly expands. Once a sale occurs it is set in concrete. It can never change.

Our identification and classification of buying and selling provides a direct link between 2 universes.

In his book "Science in Action" LaTour demonstrates the use of two time frames and four parallel time dimensions to examine the discovery of the DNA double helix and the development of the computer.

For those who wish to investigate further.
like all good things - the following link has disappeared into the mists of time.
intra-spatial analysis at Oxford University
source http://www.stats.ox.ac.uk/grad/prospectus/node7.html
extract .. a number of projects involve spatial statistics and image analysis. Spatial statistics is concerned with structure in apparently haphazard arrangements of objects, such as clustering, the spatial distribution of ... The topic becomes image analysis when the data are images .. one of the classification tasks being pattern recognition methodology. Recent work has concentrated on a unified overview of classification and the theoretical foundations of neural networks, as well as applications to financial trading. There is also research on the problems of describing spatial mosaics (patterns of colours in two-dimensional images) and their extensions to higher dimensions, on the stochastic modelling of spatial data ..




stochastics

Stochastic Games, Stochastic Transitions, Stochastic Uncertainty
source - Department of Computer Science Warwick University
Game theory is a study of competitive interaction in relationships ranging between conflict and cooperation. Originally conceived as a mathematical foundation of economics, it provided new techniques and insights in logic and set theory, evolution and population biology, auction design and implementation, design and study of the internet, analysis of cold war strategies, etc. Dynamic games are used to model competitive processes evolving over time. Stochastic transitions are used for abstraction in modelling or to formalize inherent uncertainty, leading to quantitative statistical analysis. Stochastic games are dynamic games with stochastic transitions. A wide range of applications including economics, queueing theory and performance .. Markov chains, transition systems, to Markov decision processes, to 2-player and multi-player perfect-information and general stochastic games ... competitive dynamic behavioural models.



the lock step effect

In the main the spi moves in lock-step with the cash. There are 3 time periods. The "open session" and "happy hour" and the time in between. During the open session the cash adjusts for any movement in overnight markets. Happy hour is discussed elsewhere. The rest of the time is lock-step time. Occasionally the spi will race ahead of the cash by 4 or 5 points then wait for cash to catch up, or come back to cash and get in step again. nb: The time in between can be viewed as "jobbing time". Gives the "boys" something to do. Keeps them on their toes. Unless an "event" happens.




behaviour theory - giffen behaviour

Abstract. Economists have long searched, unsuccessfully, for convincing evidence of a Giffen behavior, i.e., consumers who, under some circumstances, respond to an increase in price by demanding more. (They) examine several theoretical approaches to the Giffen phenomenon showing that in each case Giffen behavior is closely associated with traders reacting to an increase in price by buying more.



untouchables

The untouchable effect occurs when a reasonable sized order sits in the market, for a long time, and somehow, never gets touched, with all the activity occurring just above or below it. There is a reason it never gets touched. If it's an ask all activity occurs just below it, with other sellers jumping in 1 point below. Every time a seller jumps in front it is hit immediately. The buying hitter is the same "person" as the untouched seller. They won't touch themselves. If it's a bid all activity occurs just above it, with buyers jumping in 1 point above. Every time a buyer jumps in front, it is hit immediately. The selling hitter is the same "person" as the untouched buyer. They won't touch themselves. It's the sheep dog in action.

Full explanation see zero-profit market-making in the market-maker section 28



insurance

Whenever there is a fear the stock markets will fall (significantly) investors will buy insurance, by selling Stocks and buying Interest rate non-stock Futures. (a) Currencies for very short term, fast moving, high liquidity or (b) Bonds and Bills for medium term, slower moving. Called the "flight to safety". Currencies and Bonds move opposite to stock markets. If they're not moving opposite to one another something is wrong. Be on enquiry.

insurance - the interest rate factor

Bond and Bill prices move for two possible reasons.
(a) if the market anticipates an interest rate move.
Bonds UP Stocks UP. Up anticipates a rate cut.
Bonds Down Stock Down. Down anticipates a rate rise.
Bonds and Stocks move together
(b) buying for insurance
Bonds Up. Stocks Down. The flight to safety.
Fear the stock markets will fall, then, subsequently,
Bonds Down. Stocks Up. Confidence returns, fear subsides.
Acceptance of risk, with a move away from safety, back to stocks.
Bonds and Stocks move against one onother
(c) Interpretation
If Bonds and Bills move up while interest rate environment doesnt change, its a flight to safety.

buying insurance - flight TO safety

Expectations the stock market will fall causes a flight to safety. Cash is pulled out of the stock market and bonds/bills are bought. Buying insurance. Prices move up. In the absence of a pending interest rate move, a move up in bonds indicates flight to safety. Out of stocks. When Bonds rise, stocks should fall. Stocks rising is divergence.

selling insurance - flight FROM safety - confidence returns

Expectation the stock market will rise, causes a flight away from safety. Cash is pulled out of bonds/bills and stocks are bought. Bond prices move down. Insurance is being sold. In the absence of a pending interest rate move, a move down in bonds indicates a reversal of the flight to safety. Bonds falling Stocks should rise. Stocks falling is divergence.



statistics

Time Zones - when high's and lows occur

2004
time highs % lows % total % %
10:00
10:30
11:00
11:30
12:00
12:30
13:00
13:30
14:00
14:30
15:00
15:30
16:00
16:30
Total
 57
28
23
13
8
6
7
4
0
10
14
9
15
55
249
 23
11
9
5
3
2
3
2
0
4
6
4
6
22
100
 65
39
20
9
6
4
4
4
2
8
16
10
11
51
249
 26
16
8
4
2
2
2
2
1
3
6
4
4
20
100
 122
67
43
22
14
10
11
8
2
18
30
19
26
106

 24
13
9
4
3
2
2
2
0
4
6
4
5
21
100
 18
16
8
5
6
5



9
7
6
8
12

column 2 = number of days the high occurred in that time group
column 4 = number of days the lows occurred in that time group
column 7 = total % distribution for ye 2004
column 8 = corresponding data for 3 years ending 1999

24% of highs and lows occur before 10:00am
37% of highs and lows occur before 10:30am
21% of highs and lows occur after    04:00pm
24% of highs and lows occur in the space of 10 minutes
45% of highs and lows occur in a band of 40 minutes
58% of highs and lows occur in a band of 70 minutes

This demonstrates 50+% of the time, the high and low, occur in the first or last half hour.
2005
time highs % lows % total %
10:00
10:30
11:00
11:30
12:00
12:30
13:00
13:30
14:00
14:30
15:00
15:30
16:00
16:30
Total
 44
42
16
9
8
7
8
4
11
7
8
9
14
64
251
 18
17
6
4
3
3
3
2
4
3
3
4
6
25
100
 57
46
20
14
11
6
6
2
3
6
11
9
10
50
251
 23
18
8
6
4
2
2
1
1
2
4
4
4
20
100
 101
88
36
23
19
13
14
6
14
13
19
18
24
114

 20
18
7
5
4
3
3
1
3
3
4
4
5
23
100



insider trading in futures

ASIC does not pursue insider trading on futures as it considered a professional arena where participants are sophisticated enough to understand the risks. They also sign a memorandum acknowledging they are aware of 'all' the risks. Stunned by this, a colleague rang ASIC who confirmed the statement as true. Straight from the horses mouth.


There are 4 sets of SFE rules comprising nearly 1000 pages. Without mention of insider-trading.

SFE Exchange Business Rules
SFE Clearing Business Rules
SFE Exchange Operating Rules 496 pages.
SFE Exchange Trading Rules 228 pages.
SFE Trading Rules.
There are two main section of by-laws. Clearing and General. The Clearing rules deal specifically with breaches of clearing and reporting matters. The General by-laws indicate members are subject to general external laws. There is no mention of insider trading or front running. Insider Trading Laws are governed by Corporations Law and Criminal Law. These laws provide for two issues. Prohibited Conduct and Insider Trading. Insider Trading deals with a person trading on the basis of undisclosed price-sensitive information regarding "a company's securities". The key words are "company securities". Because futures do not constitute a security of "'a company'" that law does not apply. As insider trading, under the present law, does not apply to futures trading, it can be construed that insider trading is therefore not illegal if conducted in futures. If a person becomes aware of price-sensitive information that will have a significant affect on the price of that company's share and therefore the index, and therefore the index-futures, then if the information is used to to buy or sell futures and not the company's shares, it is not illegal. On the same basis front-running the futures market is also not illegal. Open season. However, In the US, entering into options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade. This practice is expressly forbidden by the SEC. Cold comfort.

Australian Government Corporations and Markets Advisory Committee.
Definitions and authorities on insider trading rules camac.gov.au clauses 1.5 and 1.6
January 2005 Camac confirms current Federal position on insider trading.

 

disclosures

3 simple solutions to one complex problem.
disclosures - a
Stock Broker newsletters usually disclose all stocks held by the house. ASX rules require stock-brokers to (a) to disclose the identity of securities the house holds - but not the extent - when giving advice. (b) seek permission of clients when the house wishes to cross a client order (crossings) with the house account. Such rules do not apply to futures brokers even though they issue advisory bulletins.
disclosures - b
In this electronic year of 2005, the age of the internet, here is a simple suggestion.
At the close of business each day the following disclosures should be made on broker web-sites

Stock Brokers - name and quantity of stocks held in house accounts.
Futures Brokers - contract id and number of open positions held in house accounts.

disclosures - c
In the absence of (a) or (b) above.
Participating brokers are required to submit all executions to the ASX by 7:00am the following day. The ASX has the capacity to collate the information and publish it on the ASX web-site.

not hard to do




westcoasters, manhattan natives, manhattan scionistas

On Tuesday 30 November 2004 at 16:00 pm accumulated volume was 12,000 contracts. Range for the day was moderate. By 1630pm the spi had fallen 26 points, a discount to cash of 9 points. Previous day closed at a premium to cash of 13 points. Final volume was 18,000. An additional 50%, or 6000 contracts, were done in the last half hour. This type of activity is usually a precursor to a serious move in US markets. At 19:30 Australian eastern standard time, 3 hours later, the DOW futures fell over. The following day SPI closed at 7 point premium. Day after that 16 point premium. Someone knew something. See insider trading above. Knowing the AU market tracks the US market, instruments outside the jurisdiction of the SEC are very appealing.



Laws - Principles - Theories

Laws
Law of large numbers
Law of observation
Law of probability
Law of supply and demand
Law of unintended consequences

Principles
Gestalt principle of continuity
Gestalt principle of proximity
Pareto's principle

Theory
Theory of games
Theory of observation
Theory of supply and demand
Quantum theory
Black Box theory

Technical analysis was born to work with individual stocks. Not compound complex indexes

PROBABILITY implies credibility short of certainty.
The mathematical theory of probabilities deals with measurement of credibility.
Measurement exemplified by games of chance.

Multiplicative Law of Probability - often used to determine the probability of an event which involves a sequence of random occurances.

Additive Law of Probability - Theorem : The probability of the union of two events occurring
Probabilities of Compound Events


craig mclean from pit to screen http://www.afsd.com.au/article/traderspace/trader9a.htm

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