Program Trading, Arbitrage, Ect...

[darthtrader 10]

Anyone know much about this stuff? Considering the % volume of program trades I'm trying to get a more general view of the mechanics.

What peaked my interest was this little pdf that was from a presentation at the futures summit 2 years ago:

"Anti-Arbitrage" - Combating Automated Trading Systems

http://www.fts.cme.com/files/janowski.pdf

I would love to have checked out that presentation but I can't find anyway to access it now.

I know I've read somewhere that the arbs use the ES to "sweep" the big pit contract. I can only vaguely understand what that means. S&P is a good example. You have cash, the big pit contract, SPY, ES...anyone have an understanding of how things fit togather?

[Soultrader 12]

I can explain a few things from what I know here in Japan. I dont know much about arbitrage in the ES and such but for the Nikkei it is rather simple.

 

The Nikkei is traded both in the Osaka Stock Exchange (OSE) and Singapore Exchange (SIMEX). The tick increment for the OSE contract is 10 yen while the SIMEX contract is 5 yen.

 

1 tick (10 yen) = approx $100 for OSE contract

1 tick (5 yen) = approx $25 for the SIMEX contract

 

So arbitrage occurs simply by buying the bid and selling the ask. For example, you will buy 2 contracts at SIMEX at the bid of 12755 and then offer 1 contract at the ask on the OSE at 12760. This arbitrage allows a 5 yen profit with minimal risk. Unfortunately the system and resources required to do this can only be done by institutions.

 

In regards to program trading, I have no clue how the calculations are done but depending on the difference btween the cash and futures, institutional traders will send out basket orders. Early morning reversals here in Japan are usually program orders. This is a common strategy applied by many institutions here. We used to be amazed by the 10:00am reversals as it was most likely controlled by one big institutional trader. What this guy used to do was buy a basket of best performing stocks and sell a basket of worst performing stocks. This caused massive reversals in the futures market.

[darthtrader 10]

ahh good stuff. Little stories like that are what I'm looking for, just little insights.

I guess in general what I would like to eventually get into is tracking a few highly correlated instruments against YM as an indicator. Not to do any sort of arbitrage but as that pdf above mentions, "the only way to beat the programs is to not trade with them".

I kind of wonder how many times you have a valid setup on your instrument that would have been a winning trade, but some other correlated instrument has moved out of wack(that your not even thinking about) so the programs/arbs come in and mess things up with an arbitrage. Would be interesting then too to see if your setups worked better when correlation was tight with nothing for the programs to trade.

[thrunner 10]

I don't calculate this stuff, but this may be what you are looking for at Program Trading, Fair Value, Index Arbitrage Values - indexArb.com webpage : sample Esignal calculation efs.

 

Q: What is program buying and selling?

A: When the S&P 500 premium (the difference between the S&P500 futures price and the S&P500 cash (regular index) price get to certain extreme levels (as identified by the buy and sell thresholds on indexarb.com for example), a certain kind of program trading (computerized trading) will take place to take advantage of the small out-of-whack premium levels: index arbitrage.

 

Program Buying - When top circled premium is hit institutions buy the S&P500 stocks and short the S&P 500 futures.

 

Program Selling - When bottom circled premium is hit institutions will sell the S&P500 stocks and buy the S&P 500 futures.

 

In short program buying and selling do have an effect on the market, but it is not always clear which way the market will be influenced. If you hit the program sell threshold, the S&P500 futures (and thus the DOW) do not necessarily move up, and vice versa with the buy threshold being hit. There are entire courses and systems/services dedicated to determining which way the market will move based on program trading.

[mister ed 10]

Hi Darth and Soul

 

I am not sure if this is the sort of thing interesting to you also Darth - I have cut and pasted a few articles from around the place on algorithmic trading. Might be of interest (I find this stuff fascinating ... and try to learn about it on the basis that the more I know about it the better I can understand whats happening in the market).

 

All the articles are referenced with links so if you want to check out the original etc.

Algortihmic trading articles.pdf

[darthtrader 10]

Ahh great stuff guys, I remember that indexarb site but couldn't find it tonight.

I found this site that has some interesting information from that pdf somehow, haven't gone through it all yet:

SPI Futures trading systems components of SPI200 index futures

 

I totally agree Mr Ed, its extremely fascinating although I'm still trying to figure out if there is any utility to this stuff. I read some on some site from that pdf that some of the program execution trades have got down to 10 milliseconds and what an improvement that is over 100 milliseconds....

[darthtrader 10]

so does anyone use PREM still here? I remember soultrader had it on his videos but I didn't really get it then.

I've been watching the fair value levels from indexarb all morning on YM and S&P PREM. I almost want to say those levels are kind of bogus. 3 hours in and the PREM has not hit the level they gave any probability of program trading to yet on either direction. If programs are such a high volume of the total market that makes no sense at all. I almost wonder if their formula hasn't accounted for the dramatic increase in program trading in recent years.

 

Something interesting from watching the tape this morning is when PREM started moving up, once it hit its peak above 2 you seen the tape go crazy and a fast 20 point move up, closing and prem go back to being flat. I would think that was basically programs arbing the ES/cash and then arbing on the YM/cash dow to keep everything in line. If that was the case then PREM should be a pretty nice thing to watch. Especially if your looking to counter trend trade, doesn't make much sense to be on the wrong side of PREM if the programs are going to come in and blast you with heat on the otherside to close the gap with cash.

[scalper 10]

In regards to program trading, I have no clue how the calculations are done but depending on the difference btween the cash and futures, institutional traders will send out basket orders. Early morning reversals here in Japan are usually program orders. This is a common strategy applied by many institutions here. We used to be amazed by the 10:00am reversals as it was most likely controlled by one big institutional trader. What this guy used to do was buy a basket of best performing stocks and sell a basket of worst performing stocks. This caused massive reversals in the futures market.

 

interesting information.. Thanks

[mister ed 10]

If programs are such a high volume of the total market that makes no sense at all.

 

I think 'program' trading, in a narrow sense, refers to those arbitrage activities where stock bought/futures sold or stocks sold/futures bought, whereas there is also a broader sense in which the word is used to refer to other types of automated activity. I think the best word to encompass all the types of automated activity executed by computers/robots is algorithmic trading. Wikipedia, while not a definitive source, has a good selection of articles and links about algorithmic trading.

 

Back to program trading and the phenomenon you described Darth. My understanding (poor though it is) of program trading (in the narrow sense described in previous paragraph) is that it is purely arbitrage, and it will account for some (quite a few) of the short, sharp moves in the futures, bringing the cash and futures 'into line'. I think an extended move like the one you described is not arbitrage but more of a directional strategy? I am out of my depth here but I think we can uncover some valuable information if we continue on with this thread. I like your attitude of trying to find utility in this stuff too, let's not just understand this stuff, lets use it to our advantage.

 

Also, I am looking forward to the movie 'Terminator 4: Defeat of the Algos'.

[HAL9000 10]

 

Back to program trading ...

 

 

Excuse me if I invite myself, but in my opinion, you have to choices (as nearly always) if a program signal appears: Join it, or fade it.

 

Well, the PREM stuff makes sense to me, even if I don't use it.

BTW, for a long time I worked on algos, but currently I like using my brain, one of my fingers, for a click.

But at some point I will reach my goal with algos.

Well and I see algos from others, just don't ignore them.

 

Hal

 

P.S.: IMO we are already watching Terminator 5: "If you can't beat them, join them!"

[mister ed 10]

BTW, for a long time I worked on algos

 

Thanks HAL - good to have someone here who has worked on algos - can you offer any insights, information etc on them? What sort of inputs did you use, how many inputs, how are they structured, what sort of execution technology was used ... any info really would be great?

[darthtrader 10]

I think 'program' trading, in a narrow sense, refers to those arbitrage activities where stock bought/futures sold or stocks sold/futures bought, whereas there is also a broader sense in which the word is used to refer to other types of automated activity. I think the best word to encompass all the types of automated activity executed by computers/robots is algorithmic trading. Wikipedia, while not a definitive source, has a good selection of articles and links about algorithmic trading.

 

Hey Mr Ed, sorry about the terminolgy. I was pretty much refering to algorithmic trading when I mentioned program trading, the broader sense of the word. Maybe the arbitrage side though what we might be actually able to see with PREM. I'm not sure if you caught these statistics, it was in some link I found from what you posted. This was sopposed to be an average day the way the trading breaks down:

NYSE Closing Summary

Trade Date 8/16/2007

NYSE Trades ....8, 908, 020

NYSE Volume....2, 989, 836, 240

NYSE Dollar Volume ....115, 188, 118, 914

Retail Buy Trades ....152, 848

Retail Sell Trades ....204, 524

Total Retail Trades ....357, 372

Retail Buy Volume....53, 008, 213

Retail Sell Volume.... 76, 575, 492

Total Retail Volume....129, 583, 705

Program Trading

Index Arbitrage Program Trades ....576, 924

Non-Index Arbitrage Program Trades ....6, 231, 010

Total Program Trades....6, 807, 934

Index Arbitrage Program Volume ....111, 238, 364

Non-Index Arbitrage Program Volume ....1, 534, 370, 009

Total Program Volume....1, 645, 608, 37

.

Program trading accounted for 55% of total NYSE volume.

Retail trading accounted for 4% of total NYSE volume.

Program trading accounted for 76% of NYSE trades.

Retail trading accounted for 4% of NYSE trades.

 

The problem came though from the index arb sites levels. I plotted lines for what they gave as the threshold on the PREM for when there was a probability greater than zero of the arbitrage programs coming in to get cash back in line with the futures. The levels were not violated all day so indexarb was basically saying there should have been zero probability of arbitrage all day when those stats say that its normally half the volume. I'll try this again all next week, maybe I just messed something up yesterday.

What I mentioned about the breakout was certainly a big leap/speculation. The thing is though I have to question that if the programs are doing that much volume, that when you see price jump ultra fast that its the programs and not humans all getting in at the same exact time. If some of programs are so directly piped into the system they can actually execute orders in 10 miliseconds they would seem to me to be the obvious culprit. I'm not sure how useful that would be if true but it could be an interesting filter to stay out of bad trades if that indexarb site levels worked. If you knew there was a 50% chance of the arbitrage programs going off it wouldn't make much sense to step in front of that on the other side.

Check out that janowski.pdf if you have not, that presentation sounds incredible. Here is his version of the terminator script:)

"

How is it Possible to Compete with

the Speed of Automated Systems?

• The answer to this question is to NOT

compete with the black-box systems

(at least at their own game)

• The key is to eliminate the “lay-ups”

that traders give to automated systems

• Traders should conduct trades at

prices that are somewhere between

the desired buy & sell prices of such

systems (i.e. “fair value” trades)"

[darthtrader 10]

I've pretty much added PREM to my trading at this point. I've pretty much given up on getting any other information on programs outside this.

my observations so far are:

-IndexArb's fair value levels are great, its basically the zero point where cash and the futures are in line.

 

-IndexArbs program probability levels are totally useless. The programs come in alot more than at the levels they say on the site. I've still never seen PREM hit the levels they give as the lowest level let alone be even close to the upper/lower end of their probability level.

 

-If you plot the fair value level it makes alot of sense to get in on the futures in the direction of PREM and not so much sense to be on the otherside of PREM(at least on YM). If you get in on the other side your basically overpaying for the futures vs cash.

 

-I have yet to see the futures be over/undervalued vs cash, then the cash market move so fast in the opposite direction that it triggers a program.

 

-If you do the above, your still never going to know when cash/futures get out of wack to trigger a program. If you get in on the futures when they are undervalued though, maybe you get lucky and a program goes off in your direction. Its really interesting on a breakout at a key level because you can kind of see in price action when the programs move YM for 10-15 points, then you get the chasers who then give the futures a bit of follow through. If your in the trade and get a program on your side, its a good time to take some profit and sell to the chasers if it fits your time frame.

 

-Its especially good to watch this for trade management once your in a trade if your time horizon is low enough. If PREM drifts to the other side of your position and then spikes down huge it might be a good time to scratch if the program hasn't gone off yet. If it has your stop will probly already get hit before you can click the mouse anyway.

[MidKnight 12]

Darth, where are you getting your PREM data from. You are aware that not all PREMs are equal?

 

http://www.tradingmarkets.com/.site/Daytrading/commentary/lftw/09302005-46122.cfm

 

Here is a quote from the interview:

"

Dave: I know different data feeds use different symbols for the PREM. What are the 3 main symbols and their corresponding service provider?

 

Hank: All PREMs are calculated by the individual data vendors. Unlike stock quotes, the PREM is not calculated or fed to the data vendor by any of the exchanges. Most data vendors either do not do PREM calculations at all,or do a horrible job with the calculations. Only a handful of data vendors do the PREMs correctly and accurately.

 

With DTN, all of the PREM's are good. The PREM is SP-PREM.Z. The E-mini PREM is EM-PREM.Z. They also have the Nasdaq PREM. The symbol is ND-PREM.Z and NQ-PREM.Z for the mini contract. They recently began calculation for the Russell 2000 PREM. The symbol is RL-PREM.Z and RM-PREM.Z for the mini contract.

 

eSignal does a good job too, especially with the E-mini PREM. Their ticker symbol for PREM is PREM A0 (zero not O) and the E-mini PREM is EPREM A0. Most traders that have eSignal do not know that. If they look at the PREM at all, they look at $PREM. That symbol is not correct. It is a snapshot every 6 seconds and therefore is usually wrong. The same is true for $EPREM. It is almost never correct, since the ES contract is so active. eSignal does not have the Nasdaq or Russell PREM.

 

Comstock does a good job. Their symbol is PREM.X and EPREM.X. They do not have the other PREMs. Quote.com buys their data from Comstock. TradeStation used to buy their data from Comstock too, but now calculates all of their own PREMs. Their symbols are $SPINX and $ESINX, $NDIQX and $NQIQX, and $RLIUX and $ERSIUX.

"

[moka 10]

sorry an old thread but do you still do arbitrage trading between SGX and Osaka?