Regime Change in Volatility

[Frank 10]

'Regime Change' is quant terminology for when a market takes on a different environment. Typical 'regimes' are inflationary vs recessionary regimes, mean-reverting vs trending regimes etc....

 

Basically, the idea is that the market environment changes dramatically from time to time and blows up all the strategies that have been optimized to the 'last regime'.

 

I present data to discuss 'MP based Regime Change: TPO Count as Measure of Volatility in S&P Futures'. That is, wider 30-min bars represent a different regime than a narrow 30-min bar market does.

 

Here is some recent data:

 

 

note how TPO count (Volatility) has been dropping for 11 straight months (scan column on far left). Despite VIX remaining elevated, the S&P futures went into very narrow action over past few months. The last few days seemed to be start of a new regime. I propose that we get an upcoming 'regime' that shows some better range than past few months. But let's track it here and see how it goes.

Edited October 2, 2009 by Frank

[dam5h 10]

i would be interested to get this data going further back, where can I access it? great post and i agree with your prediction.

[Frank 10]

hi dam,

 

I have data back to 2002 -- its 25,000 rows so I will just present the Monthly Average In table form.

 

As you can see, there is a very wide range of values and it is somewhat similar to a VIX chart -- I will overlay them but here is the data table to chew on. I added 1 calculation this time which relates TPO's to the closing value --- while 1 tick is $12.50 no matter what the level of S&Ps, thought I should put it on there anyway.

 

One possible reason for an increase in volatility is not so much the level of TPO's -- but the general seasonal uptick --- the last 7 years have been flat or up from September to October --- and the fact that its basically gone down every month this year.

 

[dam5h 10]

how has this data looked of late. to my chagrin things seem to have slowed down again.

[Frank 10]

its its been regime change alright -- but for the worse...

 

TPO counts are down again this month, signalling even narrower conditions.

[Frank 10]

Let's put some data behind this -- first just update the data table for new month-to-date data. As can see, TPO counts are down again this month.

 

 

 

A second look at traditional market profile would be to look at range and its relationship to the first hours range. What is odd about this market is that it has in general been doing first hour range consistent with 2007's type of average -- ~7.75 - 8.00 pts ---- but then there is not much range past the first hour. so while overall range for the day is similar to 2003-2006, ~11-13 pts -- it is skewed more towards the beginning of the day. This isn't meant as something I expect to continue or a forecast in any way -- just pointing out the nature of the profile relative to history.

 

Edited October 14, 2009 by Frank

[zdo 20]

“façade exhausted bulls and broke, beat up bears” was a comment from my blog. But something else is going on - narrowed ‘volatility’ coupled with very atypical slope (ie HUGE movement in short time period and virtually nonexistent scotoperiods). Hm ??

[Frank 10]

one way to get better grip on this is to look at historical statistics comparing THAT DAYS intraday volatility. The concept being that if TPO count is low in morning, the afternoon will rarely show dramatically different TPO counts -- thus, can adjust to that days volatility to some extent --- with statistical caveats of 'outliers' always in back of mind.

 

So I did this a while ago and updated it -- basically it compares the first 7 pit session bar TPO counts to the final 7. And basically, the FINAL tpo count has fallen into a range that is 1.7 -2.1x the first 7 30-min bar TPO count. Thus, a general idea would be that to temper profit objectives on any afternoon trades in low TPO count days. And perhaps look for incrementally more in high TPO count environments.

 

[Frank 10]

Forgot to mention the main point of last post:

 

'Regime Change' will show itself when the TPO counts in the morning start getting high. Once again today, very low TPO counts.

[momentom 10]

Have you guys measured the effect of a lot of the range moving to the European time zone and earlier? Many of the best trades are now outside RTH.

[Frank 10]

did a shorter term study on that --- working on expanding it. but idea is that market forms 2 extremes during globex and then takes out one or the other relatively early in day. that 'violation' can trigger reversal -- or continuation -- which is critical time to watch.. with 1 idea playing for that extreme as target and exiting --- not waiting around to see if continuation or not.. but at end of day, narrow is narrow and good analysis is still only going to get small wins if range is narrow so that is the dominant thing at moment.

Edited October 15, 2009 by Frank

[Frank 10]

Maybe today jumpstarted volatility --- hard to say but will continue to track it.

 

The real 'issue' with volatility has been death of afternoon volatility. Its not the only time that afternoon volatlility has gone into a funk -- it usually reverses.

 

[Frank 10]

ongoing volatitlity increase...

 

[Frank 10]

Friday Oct 30 Best 'Range' Since March 26th....

 

 

[Frank 10]

A 'higher timeframe' way to graph the same idea...

 

(I have removed the data from Sep-Dec 2008 because its too hard to read the chart otherwise):

 

 

[86834 10]

This is the best post i've ever read on the internet about trading. The 'regime change in volatility' as you put it, caused me to put the strategy that i was trading back in the draw for now. I ended up not trading for 3 weeks at the end of sept and beginning of oct as i developed a new strategy that could cope with the change in volatility better.

 

Adapt or die as they say....

[Frank 10]

Thanks for the feedback, nice to know it helped.

 

I got that terminology from a book I read on quant trading -- what is interesting about your comments is that the theme of the book was that you need to put your quant models within a 'super model' which switches on and off depending on the 'regime' -- which is what you intuitively did. Nice job.

[Frank 10]

well, October did a small seasonal uptick and that was it --- then a ski slope down... January usually better than December but so far not the case - thinking this seasonal should kick in soon -- but we'll see.

 

 

[i trade 10]

Interesting stuff Frank...please keep us updated!

[86834 10]

Fantastic stuff. Hopefully the volatility that we've seen in the market today will bring things back into the 'norm' so to say....

[DugDug 10]

Also ties in with the idea a lot of systemised managed futures traders go with of continually adjusting their models for the type of market and the volatility of the market at the time.

While some traders are purists and claim that a robust system needs to be maintained over the long run to be any good - through good and bad times - others realise that certain markets and systems work well together.

(I hear with recent volatility reductions in both implied and historical volatilities that many option trading firms are felling the pinch as well. Changes in volatility definitely affects traders opportunities and mindsets.)

[Frank 10]

chart of TPO counts picking up as would be expected on seasonal basis (January usually up vs December)

 

[Frank 10]

Here were the 'good ole days' of volatility -- End of 2008 and first half of 2009 TPO counts:

 

[Frank 10]

ok, 1 more chart:

 

you do not really need to 'guess' -- you can just watch the morning session -- if its high TPO count -- that generally begets high afternoon count. conversely, 'crap begets crap' (no range in morning means day is probably a dud)... I find this concept very very useful for thinking about profit targets. keep them low if range is low -- but expand them a bit if range expands: