Press review - page 484

[Sergey Golubev]

Forum on trading, automated trading systems and testing trading strategies

Press review

Sergey Golubev, 2014.04.15 16:57

High Frequency Trading Explained Simply

High frequency trading has been in the news more, thanks in part to Michael Lewis’ new book, Flash Boys. This article presents a simple explanation of how and why high frequency trading works, and why it is good for small investors.

We will begin by imagining a market with lots of small individual traders. Then we will look at how large institutional investors change the market. Next we will look at high frequency trading. Finally, we’ll explain how small investors are impacted.

Start by imagining a stock with no particular news about it. The price is stable, but there are lot of small trades. Some investors have enjoyed gains but now think the stock is overpriced. Other investors have seen gains and have decided to jump on the bandwagon. Some investors have been watching it, and now have money to invest. Others have owned it and are happy with the stock but need some cash. So lots of orders are coming in, pretty evenly mixed between buy and sell orders. The price trend for the stock looks perfectly steady.

Now consider that the traders are not all small investors. Large institutional traders are doing the same thing—some buying and some selling—but there’s a difference between them and individual investors. When a large mutual fund or pension fund places a buy order, it could be for a million shares, not a hundred shares. Similarly, sell orders from institutions come in very large quantities.

Over the course of the day, these large institutional orders cause a lumpy pattern. The chart shows what such a price line looks like. There is no noticeable trend up or down, but each institutional order moves the market up or down, and it takes a while for the price to return to the underlying trend line. That’s illustrated with the red line in the accompanying chart.

High frequency traders try to profit from the price movements caused by large institutional trades. When a mutual fund sells a million shares of a stock, the price dips—and HFTs buy on the dip, hoping to be able to sell the shares a few minutes later at the normal price. When a pension fund buys two million shares, the HFTs short-sell the stock, hoping to close their position at a profit. (Short selling is selling stock you don’t own; you borrow the shares from a stockbroker, sell them, and then later buy the stock to return the borrowed shares.)

HFTs are buying when the price is below trend and selling when the price is above trend. This tends to reduce the price fluctuations. When they are successful, prices look like the blue line on the chart. The blips are smaller and shorter-lived.

HFT is not as easy as this simple explanation sounds. First, there are many HFTs. If one is slow, the profit opportunity may have been captured by other HFTs. Second, not every blip is just a blip. If the stock is impacted by an downward trend in the overall stock market, the HFT would buy lots of different stocks—and then watch them all go down further. A good HFT has to be fast, but not so fast as to get caught be a surprise. In practice, the HFTs are no longer just looking at just one stock in isolation. They are looking at all the prices coming in, including stocks, bonds, commodities, futures and options. This massive data crunching helps them identify what are likely to be short-term blips but not long-lasting trends.

In the early days, it was fairly easy. As more companies got into the business, the easy trades were quickly taken by others. HFTs needed to move faster and faster, while crunching ever more data to avoid losing trades. Much of the attention they have received lately is due to their extreme efforts to reduce their reaction time, which is measured in milliseconds. This effort is not made to be faster than individual investors or institutional investors; HFTs are already faster than them. Instead, the effort is made to be faster than competing HFTs.

Now, how does high frequency trading impact those of us who are small investors? Look at that chart. If I place a simple buy or sell order, I may get lucky or unlucky. My buy order may be at a downward blip, but it may also be at an upward blip. I don’t want to get lucky if it means a chance of being unlucky; I’d rather trade at that underlying trend price.

Further, investors face a spread between the price at which they buy (the “ask” price) and the price at which they sell (the “bid”). This bid-ask spread compensates the market makers for executing trades at exactly the time that I want to trade. The more volatile the stock price usually is, the wider the bid-ask spread. HFTs tend to narrow the bid-ask spread by protecting the market makers from bad news while they hold their positions. Thus, my trading costs get lower.

High frequency trading is secretive and mysterious, but not at all evil. It make the stock market more efficient and helps small investors who trade at random times over the day. I could almost feel sorry for them being misunderstood—until considering that they have made far more money than I have.

[Sergey Golubev]

AUD/USD Intra-Day Fundamentals: Australian Retail Sales and 17 pips range price movement

2017-02-06 00:30 GMT | [AUD - Retail Sales]

• past data is 0.1%
• forecast data is 0.3%
• actual data is -0.1% according to the latest press release

if actual > forecast (or previous one) = good for currency (for AUD in our case)

[AUD - Retail Sales] = Change in the total value of sales at the retail level.

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From official report:

• "The trend estimate rose 0.3% in December 2016. This follows a rise of 0.3% in November 2016 and a rise of 0.3% in October 2016."
• "The seasonally adjusted estimate fell 0.1% in December 2016. This follows a rise of 0.1% in November 2016 and a rise of 0.4% in October 2016."

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AUD/USD M5: 17 pips range price movement by Australian Retail Sales news event

 

[Sergey Golubev]

EUR/USD Intra-Day Fundamentals: ECB President Draghi Speech and 34 pips range price movement

2017-02-06 14:00 GMT | [EUR - ECB President Draghi Speaks]

• past data is n/a
• forecast data is n/a
• actual data is n/a according to the latest press release

[EUR - ECB President Draghi Speaks] = Speech on monetary policy before the European Parliament's Economic and Monetary Affairs Committee, in Brussels.

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From official report:

• "Our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation."
• "We therefore continue to look through changes in (harmonized) inflation if we believe they do not durably affect the medium-term outlook for price stability."
• "But support from our monetary policy measures is still needed if inflation rates are to converge towards our objective with sufficient confidence and in a sustained manner. The pickup in headline inflation in December and in January largely reflects sizeable upward base effects and recent increases in energy prices. So far underlying inflation pressures remain very subdued and are expected to pick up only gradually as we go on. This lack of momentum in underlying inflation reflects largely weak domestic cost pressures. The still significant degree of labour market slack and weak productivity developments are weighing down on wage growth."

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EUR/USD M5: 34 pips range price movement by ECB President Draghi Speech news event

 

[Sergey Golubev]

S&P 500 - bullish with key resistance at 2,300 (adapted from the article)

Daily price is located far above 100 SMA/200 SMA reversal area by breaking the high of the last month at 2,300 to above for the bullish trend to be continuing.

• "The market has been very choppy since the middle of December; this makes for tough trading and calls on us to be disciplined in picking entries isolated to pullbacks. So, while the market looks poised to pick up some more points for the longs, buying the breakout isn’t the most appealing approach. This is especially true given that there lies resistance not far beyond the prior highs. The Feb and Nov trend-lines converged to form resistance during late January. While the confluence by convergence is past, we will still give respect to these top-side lines on approach. The first is the Feb trend-line, lying ahead around the 2310 mark. It’ll take an aggressive move higher to catch the more sharply angled Nov trend-line." 
• "The market may chop around or decline towards support again, but barring a sharp sell-off below these levels an opportunity may exist for buyers to step in at attractive levels. The area including the old highs around 2277, the 12/30 trend-line, and swing low at 2267 offers a zone of solid support. There are other levels below this zone which come into play that the market would also need to clear for the currently bullish tilt to turn bearish. The numerous levels on the down-side in close proximity to one another will continue to keep the market well-supported for now." 

[Sergey Golubev]

AUD/USD Intra-Day Fundamentals: RBA Cash Rate and 36 pips range price movement

2017-02-07 03:30 GMT | [AUD - Cash Rate]

• past data is 1.50%
• forecast data is 1.50%
• actual data is 1.50% according to the latest press release

if actual > forecast (or previous one) = good for currency (for AUD in our case)

[AUD - Cash Rate] = Interest rate charged on overnight loans between financial intermediaries.

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From official report:

• "At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent."
• "Taking account of the available information, and having eased monetary policy in 2016, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

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AUD/USD M5: 36 pips range price movement by RBA Cash Rate news event

 

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S&P/ASX 200 Index: range price movement by RBA Cash Rate news event

[Sergey Golubev]

EUR/USD Intra-Day Fundamentals: French Trade Balance and 29 pips range price movement

2017-02-07 07:45 GMT | [EUR - French Trade Balance]

• past data is -4.4B
• forecast data is -4.2B
• actual data is -3.4B according to the latest press release

if actual > forecast (or previous one) = good for currency (for EUR in our case)

[EUR - French Trade Balance] = Difference in value between imported and exported goods during the reported month.

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From rttnews article: French Current Account Deficit Narrows In December

• "The current account deficit fell to EUR 1.1 billion in December from EUR 2.8 billion in the previous month."
• "The goods trade deficit narrowed to EUR 0.9 billion in December from EUR 2.6 billion in November. Meanwhile, services trade balance turned to a surplus of EUR 0.1 billion from a balanced figure in the prior month."

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EUR/USD M5: 29 pips range price movement by French Trade Balance news event

 

[Sergey Golubev]

USD/CAD Intra-Day Fundamentals: Canada's Trade Balance and 31 pips range price movement

2017-02-07 13:30 GMT | [CAD - Trade Balance]

• past data is 1.0B
• forecast data is 1.2B
• actual data is 0.9B according to the latest press release

if actual > forecast (or previous one) = good for currency (for CAD in our case)

[CAD - Trade Balance] = Difference in value between imported and exported goods during the reported month.

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From official report:

• "Canada's merchandise trade balance with the world recorded its second consecutive monthly surplus, narrowing from a revised $1.0 billion in November to $923 million in December. Exports were up 0.8% on the strength of higher energy product prices. Imports increased 1.0%, mainly on stronger imports of aircraft and industrial machinery."
• "In real (or volume) terms, exports were down 1.4% in December as a result of declines in metal ores and non-metallic minerals as well as motor vehicles and parts. Import volumes were up 0.4% on higher real imports of industrial machinery, equipment and parts. Consequently, Canada's trade surplus with the world in real terms narrowed from $2.9 billion in November to $2.1 billion in December."

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USD/CAD M5: 31 pips range price movement by Canada's Trade Balance news event

 

[Sergey Golubev]

Technical Intra-Day Targets for EUR/USD by United Overseas Bank (based on the article)

EUR/USD: ranging waiting for direction.

H4 price is located within 100 SMA/200 SMA reversal area and near and above 200 SMA in the ranging area of the chart: the price is testing 1.0655 support level to below for 1.0620 level as the nearest target for the bearish reversal. By the way, UOB is evaluating the trend for this pair as a neutral with 1.0700/1.0615 range:

"The ease of which the strong 1.0700 support was taken out came as a surprise (low has been 1.0653). EUR has likely made a short-term top at 1.0825/30 last week and the current pull-back from the high appears to have room to extend lower towards 1.0615, possibly extending to 1.0575. At this stage, a sustained move below 1.0575 seems unlikely. Resistance is at 1.0735 but only a move back above 1.0760 would indicate that the immediate downward pressure has eased."

RSI indicator is estimating the ranging trend to be continuing in the near future.  

• If the price will break 1.0700 resistance level on close H4 bar so the primary bullish trend will be resumed.
  
• If price will break 1.0620 support on close bar so the reversal of the price movement from ranging bullish to the primary ebarish market condition will be started.
  
• If not so the price will be on ranging within the levels.

Resistance	Support
1.0700	1.0655
N/A	1.0620

• Recommendation to go short: watch the price to break 1.0620 support level for possible sell trade
• Recommendation to go long: watch the price to break 1.0700 resistance level for possible buy trade
• Trading Summary: ranging

[Sergey Golubev]

Technical Intra-Day Targets for AUD/USD by United Overseas Bank (based on the article)

AUD/USD: bullish to be resumed

H4 price is above 100 SMA/200 SMA in the bullish area of the chart: the price broke symmetric triangle pattern to above with 0.7680 resistance level to be broken for the bullish trend to be resumed. By the way, UOB is evaluating the trend for this pair as a bullish with 0.7700 key resistance level:

"AUD desperately need to ‘punch above’ the major 0.7700 resistance or the risk of short-term top would increase rapidly. In other words, the bullish phase that started last Friday may come to a premature end unless there is a move above 0.7700 within these 1 to 2 days. Alternatively, a break below 0.7595 would also indicate that a short-term top is in place."

RSI indicator is estimating the ranging trend to be continuing in the near future.  

• If the price will break 0.7680 resistance level on close H4 bar so the primary bullish trend will be resumed with 0.7695 target to re-enter.
  
• If price will break 0.7605 support on close bar so the secondary correction within the primary bullish trend will be started.
  
• If not so the price will be on bullish ranging within the levels.

Resistance	Support
0.7680	0.7605
0.7700	N/A

• Recommendation to go short: watch the price to break 0.7605 support level for possible sell trade
• Recommendation to go long: watch the price to break 0.7680 resistance level for possible buy trade
• Trading Summary: ranging

[Sergey Golubev]

Brent Crude Oil: 53.56 level for the correction to be continuing; 50.63 level for the bearish reversal to be started (adapted from the article)

• "Crude Oil has become the poster-child for low volatility. As we head into the second week of trading in February, we have yet to break out of the macro opening range set in the first two weeks of January. The macro opening range high on January 03 is $55.21/bbl and the macro opening range low on January 11 is $50.75/bbl."
• "Given the extreme positioning divergence between speculators and hedgers, it is worth waiting to see which level, support or resistance will break. Should either level give way, and one side of the market fail to hold their position and reverse, we could see a strong follow through. In addition to the extreme positioning as displayed on the chart below, the Oil market is sitting at extremely low volatility right now, and the price is above long-term support near $50/52 per barrel."

Daily price is located above Senkou Spam line which is the virtual border between the primary bearish and the primary bullish trend on the daily chart. The price is started with the secondary correction in the beginning of this month with the support level at 54.59 to be broken to below for the nearest re-enter target at 53.56.

If the price breaks the next target at 50.63 to below so the daily bearish reversal will be started.
If the price breaks 57.42 resistance level to above on daily close bar so the bullish trend will be resumed.
If not so the price will be on ranging within the levels waiting for direction.