[es] How to Track the Smart Money/institutions After CME Data Changes

[jeffersondaarcy 10]

INTRODUCTION

By now most people know that the CME has changed the way that they distribute data (2.5 times as many trades/day, avg. size trade dropped form 12 to around 4 contracts, 80% drop-off in trades greater than 199 contracts). In the past, if I bought 100 contracts at market, the tape (time and sales) would directly reflect this. After the CME changes, the tape no longer shows my single 100 buy market order. Instead, my buy order is broken up on a per counterparty basis. Meaning, if it took 100 counterparties each offering a single lot to fill my market order, then the tape would show 100 one lot orders. As a result, filtering by trade size in an attempt to follow the smart money/institutional trader has become obsolete (sure, one can filter by 50 contracts, but there are retail traders that trade in 50 lots also, so I don't believe this method is very valid).

 

TAKING THIS A STEP FURTHER

If a large market order is executed (assume 100 or greater), this means that not only is someone willing to buy 100 contracts, but someone had a limit order of 100 contracts or more offered. Essentially, this is a zero sum game in regards to snuffing out the smart money. At worst, the big guys are playing games with the market, trying to manipulate the tape by getting people to follow large orders.

 

I have a lot more thoughts on these changes, how to adapt, potential solutions, etc. but I want to hold off for now so as not to pollute the creativity pool. So here is the question to the group:

 

Due to the CME changes, how does one now follow the smart money/institutional trader?

 

 

 

Note: UrmaBlume has a solid thread on "trade intensity" that many would find interesting. Definitely worth the read. However, I would appreciate it if the trading approach from that thread did not spill over into this thread as this thread's purpose is to generate new ideas and approaches. All ideas, no matter how outlandish, welcome.

[brownsfan019 17]

If you believe in support/resistance trading then nothing has changed w/ this data change from the CME. The bulls will still defend support and the bears will still defend resistance. Of course the name of the game is defining s/r levels that work.

 

Personally this data change did nothing to affect my trading - good or bad.

[jeffersondaarcy 10]

Browns-->So you don't read price action around support and resistance levels? Very often in the past the smart money would turn before the dumb money did at S/R levels. It was a great tell.

[zdo 20]

see post below... site came up with 'error on page' when I posted first time so I thought it didn't take and posted basically the same thing again.

Edited October 15, 2009 by zdo
deleting post

[zdo 20]

Jefferson,

 

Excellent questions.

 

Has anyone gotten the official line from CME about why they did this change?

 

Are all CME instruments included?

 

Thanks,

 

zdo

[jeffersondaarcy 10]

Has anyone gotten the official line from CME about why they did this change?

Are all CME instruments included?

zdo

 

The change is for equity index futures only. The CME is also now providing transaction time data to the millisecond.

 

The official line is that it is more accurate trade data (I would argue it is less accurate since it allows institutions to hide their intentions by disguising themselves as many small traders).

[Kiwi 16]

Official lines are often just that --- tell the big li(n)e.

 

The CME is just serving the people who buy them lunch so they look after their friends. Obviously the small traders need to start buying them lunch (can you even get into the same clubs) or democracy will continue to act as it always has. It is moderated by the need to keep the peasants happy but it spends a lot of time figuring out how to support its supporters.

 

Follow the money and the free lunches

[brownsfan019 17]

Browns-->So you don't read price action around support and resistance levels? Very often in the past the smart money would turn before the dumb money did at S/R levels. It was a great tell.

 

Yes, I read the 'price action' at s/r levels. That's pretty much all I do. And for that, I don't need or use the tape or trying to find big orders. The big orders are there and it's fairly obvious (on most days).

[jeffersondaarcy 10]

Yes, I read the 'price action' at s/r levels. That's pretty much all I do. And for that, I don't need or use the tape or trying to find big orders. The big orders are there and it's fairly obvious (on most days).

 

I think we have different definitions of what "price action" is and is not. In order to avoid confusion, what do you consider "price action" and how do you watch it (chart, footprint, etc.)?

 

I'm curious as to how you spot these "fairly obvious" big orders and how you apply this information (playing for breakout or playing reversion). Or, do you look to fade every S/R level no matter what knowing that the odds of a reversion outweigh the odds of a breakout, thus putting probability of success in your favor?

[brownsfan019 17]

I think we have different definitions of what "price action" is and is not. In order to avoid confusion, what do you consider "price action" and how do you watch it (chart, footprint, etc.)?

 

I'm curious as to how you spot these "fairly obvious" big orders and how you apply this information (playing for breakout or playing reversion). Or, do you look to fade every S/R level no matter what knowing that the odds of a reversion outweigh the odds of a breakout, thus putting probability of success in your favor?

 

I agree that the phrase 'price action' is tossed around forums as the current gotta have it phrase. For me, price action means what I'm seeing on my charts. I use basic candlestick charts and moderate the candlestick corner, have my levels I'm looking for and that's it.

 

Great 2nd part ... Personally, I'm a 'flexible price action trader'. I like to refer to it as FPAT. All kidding aside, when price reaches my target area, I'm looking to ride the wave - up or down. That means sometimes I get tossed around a bit until it decides where it wants to go, but usually I can be flexible enough to ride the wave of volume to the next destination. In other words, when my timing is right on (like today's grain trades) I'm fading OR going with the breakout and it's 1 trade and done. Other days, I might have to fire a few bullets before I hit my target.

 

But the key is finding an area where price will hopefully decide where it's going and quickly. Chop is the worst thing that can happen to me, so I have to find areas where I believe price will not stay long before taking off in some direction. That's partly why I'm fairly particular about my entry points and also why I monitor 5+ markets at the same time b/c I'm looking for a particular setup. Usually these areas produce quick movements as the result of volume entering the market, which I assume is the bigger players defending the zone ... or a whole bunch of us little guys ganging up at the same time. In the end, we have no idea if we are with or against the 'smart' money, but I just assume that if price is moving the direction I anticipated, then I found the smart money guys.

[UrmaBlume 10]

The changes in CME reporting more accurately reflect what is really being traded.

 

They are NOT breaking down large trades. What happened in the past is that some trades were combined.

 

These combinations mislead those that track size as a means of tracking commercial activity.

 

Even with the changes - size is not the best way to track the commercial trade that matters. There is speculative commercial trade and there is commercial premium arbitrage. Arbitrage trade involves more contracts traded in bigger size than the kind of commercial speculative trade that defines local extremes. Being able to tell the difference between commercial speculative trade and commercial arbitrage as it happens is very important to the successful speculator.

 

It is very true that commercial spec traders go to great lengths to disguise their trade and one method is to auto fire very fast small orders another is to make trades on both sides.

 

One should note that well over half of the stock volume that is traded on the NYSE is about program trading or premium arbitrage. When those programs are executed is when you see the commercial trade size and it is of little value to the speculator. They do huge lots of stocks and then a size futures trade to complete the basket. That is NOT the way local extremes are formed.

 

The trade that is done by commercials that IS of value to the speculator is the machine executed, high intensity, small sized trades that mark most local extremes. A verfification that this action is happening is that you can see it across all 3 major equity futures.

 

The new way is more accurate and more useful to those that track commercials as it represent true trades and not combined trades.

 

Note the pics below - they are both at local extremes and you can easily see very intense commercial trading in all 3 markets that is coordinated down to the sub 1-minute time frame.

 

This shows how extremes are formed by commercial trading and it is more easily detected with the NEW data than the old.

 

 

 

Edited October 16, 2009 by UrmaBlume

[jeffersondaarcy 10]

I agree that the phrase 'price action' is tossed around forums as the current gotta have it phrase. For me, price action means what I'm seeing on my charts. I use basic candlestick charts and moderate the candlestick corner, have my levels I'm looking for and that's it.

 

I'll have to check out "Candlestick Corner" when I get a chance. A cursory glance indicates that you've put a fair amount of time into it judging by the number of Sticky threads. Nice job. Do you look for candle patterns at S/R levels or is it simply a matter of watching time, tick, and/or volume-based candles form? If it's volume, I assume that you assume that large traders are present based off of the rate at which candles are forming?

 

But the key is finding an area where price will hopefully decide where it's going and quickly.

 

Agree 100%. I did a poor job of communicating this in the introductory post. For simplicity's sake, going forward, let's all assume that all attempts at tracking the smart money/institutions via reading price action (tape or otherwise) are occurring at support and resistance levels as opposed to no man's land (this would be its own unique thread).

[jeffersondaarcy 10]

The changes in CME reporting more accurately reflect what is really being traded.

Take a step back and think about what the market really is… It is buyers and sellers coming together to conduct trade, it is not a bunch of flashing blips on a computer screen. The key words are “buyers” and “sellers.” A trader purchasing a large quantity of contracts by placing many small orders does so for one simple reason: to hide his true intentions via the manipulation of trade transaction data. As a result, the market receives less accurate information, as participants are tricked into thinking many small orders took place with many buyers. I understand and accept that this is the way the game is played now, and I fully believe it will only get worse as open outcry disappears entirely, but to say that we now have more accurate data is absurd, we have lost transparency, which distorts accuracy, which creates an even more uneven playing field for the retail investor.

 

They are NOT breaking down large trades. What happened in the past is that some trades were combined.

In the past, if I bought 200 contracts by placing 200 individual one lot trades in under a second, the CME would group this trade together and report it as a single 200 lot order (feel free to call the CME and verify). The tape then reflected my true intentions (to acquire 200 contracts). Granted, during periods of high volume, market orders from several parties would sometimes get combined, I am not disputing that. However, most of the trades that were being clumped together into a single order were from a single party (once again, feel free to call the CME to confirm). This is pretty simple in my book: Trade is taking place on public exchanges and should therefore be transparent. One hundred contracts bought in under a second is one hundred contracts bought, period. The increments of purchase are completely insignificant. At the end of that split second, someone bought one hundred contracts, that’s all that matters, and that’s what should be reflected. When one combines the order subterfuge with the fact that 20% of trade is conducted in dark pools it is obvious that a very scary trend is emerging. Public exchanges need to have integrity and transparency. It’s not just the retail traders that lose; it’s also any mutual fund or pension fund holder. Basically, it is the American public that loses.

 

One should note that well over half of the stock volume that is traded on the NYSE is about program trading or premium arbitrage.

I am curious as to where you get your premium arbitrage numbers. I would argue that arbitrage has taken a backseat to speculation. Just look at the trading profits banks have recorded over the last year, they are ridiculous. In addition, all these banks have an explicit backing from the US government (aka Too Big Too Fail), which means that they can take as much risk as they want because the Fed/Gov is always going to bail them out. Furthermore, we’re witnessing a stock bubble courteous of the enormous amounts of cash the Fed has pumped into the market via POMOs, agency debt purchases, etc. I could be totally wrong on the lack of arbitrage taking place, but I just don’t see it. Please post your premium arb. source, I would love to see this data [/Quote]

 

When those programs are executed is when you see the commercial trade size and it is of little value to the speculator. They do huge lots of stocks and then a size futures trade to complete the basket.

Since your system tracks bursts, wouldn’t a single large order by an arb (assume 800 contracts) trigger your system since the large order is broken down into many small orders due to the many counterparties it would take to fill this order (thus being considered a “burst”)? How do you know that you’re tracking the commercial specs and not the arbs?

[Kiwi 16]

Being able to tell the difference between commercial speculative trade and commercial arbitrage as it happens is very important to the successful speculator.

 

You'd think you were selling something with the bold and frequently baseless or at least poorly supported claims.

 

It might be "important to some successful speculators". It might be "very important to even fewer successful speculators".

 

But it is not "very important to the successful speculator." I call BS hype.

[UrmaBlume 10]

You'd think you were selling something with the bold and frequently baseless or at least poorly supported claims.It might be "important to some successful speculators". It might be "very important to even fewer successful speculators".But it is not "very important to the successful speculator." I call BS hype.

 

LOL, Back to your same old rants, eh Kiwi. Where's the love you once showed?

 

I'd like to congratulate UrmaBlume for providing useful information and discussion with other traders and thus withdraw my suspicions and comments about his motivations in posting on the board. For the record - I guess I apologize

 

Just because you can't tell the difference or know what to do with it if you could doesn't make the information less valuable to those that can.

 

cheers

[Kiwi 16]

I wondered, even as I was happy to see useful information, whether it was real or it was guru bait. I chose to give you the benefit of the doubt.

 

As you can tell, I have decided that the apology was premature and the earlier view of you and your activities was correct. As they say, fool me twice ... so not again.

 

You continue to misuse the English language as I pointed out in the last post. In this case you choose the word rant (def: to speak or declaim extravagantly or violently.) You are the king.

 

I simply feel sorry for your suckers.

[Kiwi 16]

.

I recall you had a very similar response to someone else who wondered about you. Perhaps the sign from the TL front page is a word to the wise

.

 

[ZOSO 10]

FYI, UB has been banned from ET. Just goes to show you there are times when ET should be taken seriously.

 

Perhaps I missed the posts showing the profits UB generates from all this information he cuts-n-pastes at TL. Please, anyone, post those links.

[jcash 10]

UB, you have provided myself and others with food for thought re trade intensity, commercial traders, etc., but i have to admit your motive is suspect.

 

you have posted, verbatim, some of the same stuff on multiple forum sites. for instance, ET, T2W, Nuclear Phynance, finance visor and TL. what are you looking for? you say you are not selling anything. are you trying to build an audience for your upcoming book?

 

i enjoy your posts, but just trying to figure out your motive. it is a bit unusual for someone to "carpet bomb" all the trading forums with the same thing.

[ZOSO 10]

 

 

I am curious as to where you get your premium arbitrage numbers. I would argue that arbitrage has taken a backseat to speculation. Just look at the trading profits banks have recorded over the last year, they are ridiculous. In addition, all these banks have an explicit backing from the US government (aka Too Big Too Fail), which means that they can take as much risk as they want because the Fed/Gov is always going to bail them out. Furthermore, we’re witnessing a stock bubble courteous of the enormous amounts of cash the Fed has pumped into the market via POMOs, agency debt purchases, etc. I could be totally wrong on the lack of arbitrage taking place, but I just don’t see it. Please post your premium arb. source, I would love to see this data

 

 

The volume of trades conducted on electronic exchanges and away from the NYSE floor is now at 36% of total according to the NY Times. Most of this is dark pool and other end run activity.

 

I seriously doubt, however, GS' massive profits are generated from speculative equity trading to any meaningful extent. They don't need to do that to make huge profits, in a world where their competetion is dwindling.

 

And the theory of speculative Commercial (as oppossed to retail) activity has not proven to exist except in the minds of traders who continuosly ponder, and search for, what the so-called smart money (often referred to as the mysterious "they") is doing in the index futures markets.

Edited October 17, 2009 by ZOSO

[ZOSO 10]

UB, you have provided myself and others with food for thought re trade intensity, commercial traders, etc., but i have to admit your motive is suspect.

 

you have posted, verbatim, some of the same stuff on multiple forum sites. for instance, ET, T2W, Nuclear Phynance, finance visor and TL. what are you looking for? you say you are not selling anything. are you trying to build an audience for your upcoming book?

 

i enjoy your posts, but just trying to figure out your motive. it is a bit unusual for someone to "carpet bomb" all the trading forums with the same thing.

 

Two motives. Ego gratification (I'm smarter than you) and stealth marketing for TradePointTechnologies.

 

Search Google if you care to find other sites where he is apparently allowed to post links to his company.

[jeffersondaarcy 10]

I seriously doubt, however, GS' massive profits are generated from speculative equity trading to any meaningful extent. They don't need to do that to make huge profits, in a world where their competetion is dwindling.

 

And the theory of speculative Commercial (as oppossed to retail) activity has not proven to exist except in the minds of traders who continuosly ponder, and search for, what the so-called smart money (often referred to as the mysterious "they") is doing in the index futures markets.

 

Aug. 5 (Bloomberg) -- Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, breaking the previous high of 34 set in the prior three months.Trading losses occurred on two days during the months of April, May and June, compared with eight days in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission...Trading and principal investments accounted for 78 percent of the bank’s revenue in the second quarter of 2009.

Goldman Sachs $100 Million Trading Days Reach Record (Update3) - Bloomberg.com

[Tams 20]

UB, you have provided myself and others with food for thought re trade intensity, commercial traders, etc., but i have to admit your motive is suspect.

 

you have posted, verbatim, some of the same stuff on multiple forum sites. for instance, ET, T2W, Nuclear Phynance, finance visor and TL. what are you looking for? you say you are not selling anything. are you trying to build an audience for your upcoming book?

 

i enjoy your posts, but just trying to figure out your motive. it is a bit unusual for someone to "carpet bomb" all the trading forums with the same thing.

 

 

I had the same suspect when I first read his posts.

 

He has subsequently explained what he was looking for in a few posts here on TL.

I don't have the links,

but they are there.

You can search his posts for detail,

in short, I can tell you this,

he said he is not looking to sell anybody anything.

[madspeculator 10]

A trader purchasing a large quantity of contracts by placing many small orders does so for one simple reason: to hide his true intentions via the manipulation of trade transaction data. As a result, the market receives less accurate information, as participants are tricked into thinking many small orders took place with many buyers. I understand and accept that this is the way the game is played now, and I fully believe it will only get worse as open outcry disappears entirely, but to say that we now have more accurate data is absurd, we have lost transparency, which distorts accuracy, which creates an even more uneven playing field for the retail investor.

 

I agree with you that calling the new format "more accurate data" is not correct. However, I disagree with you that the new format " ..is less accurate ..." and that we have "lost transparency ..... creates ... uneven playing field for retail investor."

 

CME's new format just represents the "other" side of the coin. As you might be aware, Globex is a limit-order book market. So, how does one report trades in a limit-order book market? One could report market orders or report limit-orders that fill market orders. Depending on who you are, the type of reporting might mean different things:

1. If you are a large trader, receiving data from the limit-order book's fill gives information about the liquidity (and type of liquidity) present in the market. This information on liquidity is very important to a large trader because she can be comfortable knowing that her size will not move markets. Moreover, the type of liquidity present at any point in time will dictate the strategy employed by her to execute her orders.
    
   
2. If you are a trader who depends on reports of market order fills, this new format will not enable you to see the size of the market order. Because of this reason, you claim that you have lost transparency, and that this has created an uneven playing field. Well, this claim, although definitely NOT objective, depends on one's perspective. A large trader, operating in an exchange that reports fills on market orders, might think this type of report is not fair to her because exposing her size provides opportunities for other traders to front running her orders. So, the large trader has no other option but to split her market orders into small chunks. This is not "hiding true intentions or manipulation" as you claim (which sounds derogatory) but is something necessary for the large trader to do in order to avoid ending up with "bad" fills. In spite of doing all this work to prevent exposing her orders, the large trader has no clue about the liquidity in the market which is the most important thing to her - how unfair!!!!
    
   
3. If you are an exchange then you want to report trades in the new format. An exchange can exist only if the markets it operates can provide liquidity to traders. The more the exchange does to increase liquidity in its markets, the better off the exchange is. So, this change in reporting format by CME is in line with what CME has to do to create more liquidity in its markets.
   

 

Your claim "...I fully believe it will only get worse as open outcry disappears entirely" has no merit unless you are privy to information that most of us don't have.

 

This is pretty simple in my book: Trade is taking place on public exchanges and should therefore be transparent. One hundred contracts bought in under a second is one hundred contracts bought, period. The increments of purchase are completely insignificant. At the end of that split second, someone bought one hundred contracts, that’s all that matters, and that’s what should be reflected. When one combines the order subterfuge with the fact that 20% of trade is conducted in dark pools it is obvious that a very scary trend is emerging. Public exchanges need to have integrity and transparency. It’s not just the retail traders that lose; it’s also any mutual fund or pension fund holder. Basically, it is the American public that loses.

 

I don't know what your background in trading is and how much you really understand how institutions and market makers trade, but looks to me that you are making this an emotional issue for yourself by giving this change -- the way CME now disseminates data -- more weight that it really deserves. May be your trading is TOO dependent on detecting "large" trades on the tape, in which case I can see why you might be upset with this change. Time to change your trading strategy, may be?

 

All the best.

 

Regards,

MadSpeculator

[ZOSO 10]

Aug. 5 (Bloomberg) -- Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, breaking the previous high of 34 set in the prior three months.Trading losses occurred on two days during the months of April, May and June, compared with eight days in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission...Trading and principal investments accounted for 78 percent of the bank’s revenue in the second quarter of 2009.

Goldman Sachs $100 Million Trading Days Reach Record (Update3) - Bloomberg.com

 

My thinking is those profits were not made by speculating, that is, betting on one side like black or red in roulette. Of course, it's unlikely we'll ever know for sure.