An Institutional "Look" at the S&P Futures

[steve46 12]

What I will attempt to do is to give folks a "look" at how institutional participants characterize markets. I don't suggest that institutions have a homegenous view or that my view represents all institutional participants. I suggest simply that my interpretation of the S&P futures market differs significantly from a retail view. Further I suggest that in a market dominated by professional interests, it may benefit the retail trader to learn how institutional participants view this market.

 

I will start by providing background, some of which I introduced in previous posts.

 

The attached chart displays price from late 2009, showing the 2010 open at 1113.75 and moving on into the year. Assuming some have read my previous posts, I will simply restate a previous comment, that in a "professional" market, it is common to see an end of year rally as institutions try to hit their bonus targets (item 1 on the attached chart shows the end of year rally).

 

Progressing further we see item 4, the open of 2010 at 1113.75. This open becomes one of the primary benchmarks by which institutions measure their (yearly) performance. In the process of moving from item 1 (the end of year rally) to item 4 (open of the new year), it is important to take note of items 2, 3, and 5 respectively. These areas are interpreted as demand, supply and "parked inventory". Because price moves towards volume, what we see in this chart are multiple examples of behavior that involves "tests" and "retests" In my opinion these tests provide two benefits to the primary participants. One is they allow participants to re-visit an area that might provide favorable entry at what is sometimes called "wholesale" prices, and "retests" offer institutional participants the opportunity to generate momentum by shaking out weak hands and activating both resting and discretionary orders from players who see these "retests" as a "second chance" to enter, to add to a favorable postion, to manage inventory or (as is often the case with retail participants) to minimize a losing postion by exiting at breakeven (or near to it) prices.

 

If we re-visit the chart we can see that price did in fact rally into the open of 2010, and in the process, created an area of demand (item 2) then an area of extended horizontal development that is characterized as "parked inventory" (item 3). As is typical of this kind of development, markets are "moved" to create an area of supply just above the open. This is natural as it punctuates a prolonged move up and provide a way for institutions to do two things. One is to generate first quarter profits, and the second is to retrace down to test an area of prior demand (item 2). At this point (usually on bad economic news), participants are able to "shake out" the weak hands, defend parked inventory, and initiate a move to take out the open at 1113.75...and in the process generate additional quarterly profits.

 

From February, on into mid April the market moves up steadily and then proceeds to develop horizontally (coincident with US tax season). As is usual, on bad economic news the next step is to move price down to retest prior lows. We can see the retest of supply at item 7 as markets get "marked down" into the slow summer season.

[steve46 12]

Moving on with our overview of the market, we see a chart displaying the balance of the year 2010 (or nearly so).

 

and the comment is perhaps obvious, The summer doldrums are marked by range bound activity as trading desks mark the market up and down. Notice the move down in July as again weak hands are shaken out ("shaking the tree") and then the retest as the players try to hit quarterly profit targets.

 

The end of year rally provides nice symmetry to the overview, and here again, it provides a way for insitutional players to hit end of year targets. At this point, even though we have not yet reached December, many professionals have secured performance based bonuses and are thus "motivated" not to take significant additional risk.

 

Incidentally if one were to scan left on that chart you would meet the lower boundary of supply at item 7 (probably just a coincidence lol).....

 

So what I suggest at this point, is that folks who read this take a moment to step back and simply consider what the implications might be. Although I used to use indicators (moving averages, channels, etc) I suggest that approaching the markets from a different angle might actually provide the basis for a tradeable edge.

[steve46 12]

So today lets go one step further in terms of characterizing the S&P futures market

 

Looking at the charts, one can make certain assumptions. First, one can observe that there is an agenda that explains market movement. That agenda is profit motive pure and simple, however there is also a time component, and for that reason, one can use the concept of "time and price" as a basis for action. Depending on the institution, incentives are offered based on the ability to produce alpha in the form of excess returns as measured against specific benchmarks. In terms of time, examples of "benchmarks" include the yearly, quarterly, monthly and weekly opens, highs and lows. Professionals are motivated to exceed these benchmarks and as we approach the end of each time period, if you are aware they exist, you can anticipate that participants will try to move markets in order to "defend" or to hit those marks.

 

This year the benchmarks include

Yearly open at 1113.75, high of 1224.75, low of 1002

Quarterly open at 1135.75, high of 1224.75, low of 1127

Monthly open at 1186, high of 1224.75, low of 1171

Weekly open at 1201, high of 1205.75, low of 1171

 

How is this useful, simple, if one were monitoring the charts on Friday, you would have seen that as we approached the close of regular trading hours, we were below the weekly open of 1201....As mentioned, these are areas that professional desks "target" and defend. Looking at the attached chart, you can see that in the last hour, we bounced off of support at 1195 and attempted to drive up to test that open (unsuccessfully). If one had known of this target and the motivation of players to exceed the number before the close of the week, you might have acted to enter at support and ride that move up. Its just one of many examples of how institutional traders (anyone for that matter) could use the principle of "time & price" to find a favorable entry. Actually we could go a bit further and suggest that after the open, where we saw a test drive down to 1187.50, the rest of the day was an attempt to defend and hit that benchmark. Clearly a skilled participant, aware of the motivation of institutions to defend and hit that benchmark, could have tried to obtain favorable position early, and then spent the rest of the day managing a profitable position.

[steve46 12]

So here we are its Sunday evening, and we are looking at the open of the S&P Globex market. What we see is a gap up off of friday's close. We know that participants were motivated to try to defend the previous week's open at 1201. We saw (if you read my previous post) that at the end of RTH, particpants tried to move it up to that level.

 

Here we are, and lo and behold the market gaps up on the Globex open, then retraces down to test that NUMBER (previous weeks open). Coincidence?....then it moves up right along side the Nikkei and the HangSeng.

 

Finally the DAX opens in Germany and (surprise) it also gaps up.....

 

Now....there is a LOT more to this than I am willing to offer on a public site, and I am definitely not here to put on a seminar, but what I will do is point in a direction and suggest to those who are thinking about it....that there are some real and significant edges out there, and they don't require Stochastic, MACD, Channels, Fibs...etc....

 

Where is price going from here? Depends on where the big boys decide to take it. My opinion is that they want to defend what they have earned so far this year (performance bonuses) and they want to do that, with as little risk as possible. One way of accomplishing that is to move markets north in the overnight, when a lot of folks are sleeping. As pointed out previously, I proposed that the S&P would try to find support early in Nov, then continue up from that support into the New Year. Could I be wrong, sure. Lets see what happens.

Edited November 22, 2010 by steve46

[steve46 12]

As mentioned previously, one of the differences between retail and professionals is the ability to read the tape.

 

In terms of success, this is critical I believe, because ultimately you have to accept and manage risk, and to obtain the confidence to do that, you need to develop confidence in your skills and your tools.

 

Attached is one example of a "time & sales strip". What I have done is to take a time & sales chart and adapt it so that it takes the form of a vertical "strip". I position that strip next to my chart and I use it to read the market....prior to entry in order to select a favorable point of entry....after entry to confirm that my decision was correct, or if I am wrong to tell me so, as early as possible so that I can mimimize my losses.

 

As mentioned previously I am not interested in teaching people to read the tape. That unfortunately is a difficult process that requires a lot of hand holding, hours of training and practice, and depending on the trader's aptitude, a lot of perseverance and patience.

 

What I will say is that it is very advantegeous to learn to read enough to determine whether you "see" a "held" bid or offer. Specifically that means that as price tests an important area, you want to be able to see if buyers or sellers are able to hold their ground (thats what a held bid or offer is in practical terms)..

 

Now I need to pay attention to what I am doing, so I will wish everyone good night.

[Nick1984 10]

Very nice write up Steve.

 

I used to trade on an institutional level for 2 years previously and you describe the thinking behind it very well.

 

When you are trading a long line you do not think about trading in the same way as the average retail plunger.

 

As an insto you generally try to sell on the way up in random sized blocks. You are creating the market for a lot of the retail people who you are selling your stocks to. It is a fine line to tread down as you want to ensure that your selling activity is not so big that you flood the market with inventory that you will water log a stock so you trade in very small blocks that will give the buyers what they want without decreasing the price.

 

When you buy you generally always try to see if you can shake out the weak hands in the market. A price shake out at "support" is always great to weed out weak hands and establish a better buying region. You want to buy up their panic and accumulate at the cheapest possible price.

 

As a retail trader you don't need to know how the insto's go about their business but you should always be cognisant of the thinking behind their actions.

[steve46 12]

Cheers Nick

 

Thanks for the kind words

 

I was going to hold off on this, but I think I have a few moments before I have to make a decision so here are a few additional and hopefully educational comments

 

First, what my employers want from me, it my analysis, to the extent that it provides a way of generating excess returns. In doing my analysis I look at data that experience tells me is predictive. This next chart is re-jiggered from the last one. I do this routinely (especially when I think there is a good chance that my initial "diagnosis" of the market is wrong)

 

As you can see from the chart, the best entry so far was "with" the primary trend up from a re-test of the previous week's open at 1201.50. In my judgement, this was a good entry because it resulted in a multi-point profit without a great deal of risk....As is typical of these low risk entries, they happen quickly, you have only a few seconds to decide and then the market runs away, leaving the rest of us behind. Now at the high, if one were to "scan left" you would (if you knew what to look for, see a "stopping point"). These stopping points are places were previously you have inventory or resting orders. Because I can't comment further on that I will just leave that point for now.

 

I show resistance as it is created in real time....I show support as it is created in real time and I show the probe down to find sellers. For retail traders, support develops by touching the same price (more than twice) and then failing to take it out. By the same token, resistance develops as price touches a price (more than twice) and fails to take it out. I use the terms support and resistance instead of supply and demand for good reason. Support and resistance are dynamic. That is to say, the nature of support and resistance changes in the (relatively) short term, while supply and demand levels, usually reflect the interest of players with a longer time horizon.

 

As you will see from this chart, I add a horizontal line at midnight (my time) and I use that as a pivot. I do this because from experience I have seen the market act use that time as a "line in the sand"...(notice the test of that line) and what that signifies in my opinion is a sea change from upward market bias to downward market bias. We will see. By the way, the confirmation (whether ultimately I am right or wrong) is forthcoming as the DAX and other European markets open for business. At this very important point in time, what we term a "global handshake" is in process and these markets take the lead (until the US markets open).

Edited November 22, 2010 by steve46

[steve46 12]

And here is the DAX during that time period, and as can be seen it seems to prefer heading south for the moment.

[steve46 12]

and here we are a bit later still, and you can see that indeed the market rolled over (confirming that my initial bias was wrong). If we get continuation, theres a fair chance that we will see the gap fill.

Edited November 22, 2010 by steve46

[steve46 12]

and now a final comment about the Globex. In terms of overall conceptual understanding, the reader/trader had a couple of interesting choices. The first, was a long entry based on retracement down to the previous week's open....that retrace was (in my opinion a low risk entry), but we see (in retrospect) that the market did not show continuation, instead it rolled over, coming back to fill the gap and in the process you can see (I hope you can see) a couple of nice short entries. My question to readers is....based on what I have proposed over a series of posts, "what do you think an institutional trader would have done this evening", and "what would a retail trader have done" given the same information (looking at the same charts)? If there's an interest I am glad to fill in the blanks, and if not, no big deal.

[BlowFish 10]

Always find your posts interesting Steve apart from one thing....this whole 'institutional' vs 'retail' thing. 'Institutional' traders have all sorts of motivations and modus operandi. Some of the very largest are not even 'profit motivated' in the traditional sense. Just as well really, as an ongoing study of the CoT will show 'institutions' to be on the 'wrong' side of the market just as often as retail traders!! It rather smack's of Tradeguiders 'smart money' rhetoric. Your analysis stands on it's own merit, there is no need to try to add extra weight.

 

I only mention it as I feel it distracts from otherwise excellent posts. It is not necessary to know who is trading, why and how. If one is interested then a proper study into market microstructure would pay dividends (Harris Trading and Exchanges: Market Microstructure for Practitioners is a decent starting point). There are many types of 'institutional' trader that trade in vastly different ways with quite different objectives (which to be fare you acknowledge at the start).

 

I guess what I am saying is, a better question is what would an informed trader be doing vs an uninformed trader (assuming that they where both speculating on the short term direction of the market). To answer the original question one would need to know a lot more about the motivation of this 'institutional' participant.

 

BTW have your company raised your forum embargo or have you changed jobs?

[steve46 12]

Hello Blowfish

 

I thank you for a thoughtful comment. My experience with institutions is limited, but it seems likely indeed that they are often on the wrong side of the market they participate in, and I agree that it may be "better" to characterize participants as "informed" and "uninformed" or even "educated" and "uneducated"...

 

I think the main concept that I learned and hope to get across to folks, is that the most valuable thing to learn about trading isn't how to use tools per se, but how to think conceptually about markets, and the human behavior that moves them.

 

I think I mentioned this but let me just say that happily, I have already met my profit targets for the year, for both the Bond and the Euro, and my probationary period is over. I like what I am doing, however, the pressure to perform is significant and I certainly understand now why the turnover in this business is high. I am free to comment within certain boundaries, as long as I restrict myself to the S&P market. Frankly I don't plan to continue here very much longer.

 

Best of luck in the markets

[steve46 12]

Referring back to a previous post, I remembered Matrix (I think that his/her handle) mentioning correctly that professionals try to enter below value and/or near the low end of a local distribution, looking for a move up through that distribution (also known as "value" to Market Profile adherents).

 

Tonight we have a decent example and I thought what the hell, I will post it before stopping

 

As can be seen, the market drops down to test the local distribution, and you have the obligatory spike down to try to find more sellers. The "Long Entry at Wholesale Level" is (as far as I am concerned) a slam dunk. If the trader missed that one, I have marked another opportunity (see the horizontal line at midnight my time), and by coincidence, price spikes down to that level (attempting yet again to find sellers) in the process providing another long entry at wholesale levels (below value and near the lower end of the local distribution).

 

The combination of a recent test of minor support followed by a spike test down (that failed to find sellers) and a "buying tail" (market profile folks call this "excess") are good enough for me to take a small exploratory position. As can be seen in the attachment, that entry made a few pennies, and after that in my opinion odds of an extended move up are slightly better than even. We'll see.

 

Best of luck to everyone.

Edited November 23, 2010 by steve46

[steve46 12]

and here's a bit an update on how that trade is working so far

 

As you can see price retraced back down to test one of the wholesale entry areas.

 

Then just before 3am, the market seems to have made a decision to test up (for the moment at least).

 

I will mention the idea of trading "time & price" as distinct from the current fashion where folks claim that they only trade "price action"....to each his/her own I guess, but frankly I find that orienting to both time and price gives me a significant edge. You see I can be wrong about price and still find a nice entry based on my knowledge that certain times provide advantagous entry points. Conversely, I can miss an entry based on time, and still establish favorable entry based on price (based for instance on price in relation to the wholesale/retail concept).....

 

The attached chart might help people to see what I have been talking about.

Edited November 23, 2010 by steve46

[suckassjuice 10]

Steve,

 

When you say "One way...to move markets north in the overnight (is) when a lot of folks are sleeping", you do realize that there are European desks with just as much trading power as any US desk (and on an aggregate basis as well). That's a pretty naive statement and borderline offensive. Also, when you say "I add a horizontal line at midnight (my time) and I use that as a pivot" I'll take guess that your based in the Pacific time zone. Since that happens to be the European Open, you should have stated it that way. But who cares about a bunch of sleeping foreigners.

[steve46 12]

Steve,

 

When you say "One way...to move markets north in the overnight (is) when a lot of folks are sleeping", you do realize that there are European desks with just as much trading power as any US desk (and on an aggregate basis as well). That's a pretty naive statement and borderline offensive. Also, when you say "I add a horizontal line at midnight (my time) and I use that as a pivot" I'll take guess that your based in the Pacific time zone. Since that happens to be the European Open, you should have stated it that way. But who cares about a bunch of sleeping foreigners.

 

I am pretty sure I do realize that, because I work for one of those European desks, and if you find my comment offensive, I suggest you ignore it.....there problem solved.

 

and finally, "who cares about a bunch of sleeping foreigners"...ah yes FINALLY....you see its not about foreigners champ.....its about SLEEPING....!!!! SO LETS SEE IF YOU OR ANYONE FOR THAT MATTER CAN GET THE POINT....we all have to sleep....therefore what better time to move markets with the least amount of resistance, than when a sizable percentage of participants are unconcious lol......

 

So once again (and I think for the final time since I am not a patient person) what works (for me at least) is to capitalize on the fact that markets are moved by human beings.....and those human beings act in predictable ways...knowing that...if a person is observant...he or she could take advantage (and I tried to show that some folks already do "take advantage") and in the process...make a nice profit...

 

So as in all things, some will "get it" some will not, and like a good boy scout, I did my good deed for the day\week/month/quarter/and year....best wishes to everyone for a nice holiday season....good luck eveyone

[suckassjuice 10]

Steve,

 

If you do in fact “work for one of those European desks” and you meld that with your belief that the best “…time to move markets with the least amount of resistance (is) when a sizable percentage of participants are unconscious”, exactly when is it that a sizable percentage are in fact unconscious? Please provide the GMT times (duration) when you believe this happens. This undoubtedly will help us all get "...THE POINT."

[MightyMouse 12]

I am pretty sure I do realize that, because I work for one of those European desks, and if you find my comment offensive, I suggest you ignore it.....there problem solved.

 

and finally, "who cares about a bunch of sleeping foreigners"...ah yes FINALLY....you see its not about foreigners champ.....its about SLEEPING....!!!! SO LETS SEE IF YOU OR ANYONE FOR THAT MATTER CAN GET THE POINT....we all have to sleep....therefore what better time to move markets with the least amount of resistance, than when a sizable percentage of participants are unconcious lol......

 

So once again (and I think for the final time since I am not a patient person) what works (for me at least) is to capitalize on the fact that markets are moved by human beings.....and those human beings act in predictable ways...knowing that...if a person is observant...he or she could take advantage (and I tried to show that some folks already do "take advantage") and in the process...make a nice profit...

 

So as in all things, some will "get it" some will not, and like a good boy scout, I did my good deed for the day\week/month/quarter/and year....best wishes to everyone for a nice holiday season....good luck eveyone

 

Steve, it seems that you put yourself in the group that "get it" who know how to "take advantage" . of the views that you are presenting. Of course, your views need to be correct in order to "take advantage" of the things that you "get." Typically, arrogance and condescension, which your posts are riddled with tend to indicate that there is a separate agenda that you are trying to promote.

 

Out of curiosity, where do you get the idea that people act predictably? Sheep, cows, dogs, maybe geese act predictably. People do not. If anything, they act strategically, but certainly not predictably. So I guess you can argue that it "works for you" to think that people act "predictably" but, then, not everyone else can take advantage of what "works for you". Generally, when someone thinks that it" works for them" they are holding onto a belief that is is unfounded and are one loss or disappointment away from changing what "works for them".

 

In summation, Imho, you fall into the group who think they know what trading the S&P is all about. The market has a way of humbling the egotistical. Careful when you actually put your own money into the market. It loves people who think they are right.

 

Regards,

 

 

MM

[suckassjuice 10]

Steve,

 

Exactly when is it that a sizable percentage of traders are in fact unconscious? I'd really like to know.

[jim380 10]

I think this is a great thread. There is a few qns which I have about institution traders, I will be glad if some light can be shed on these qns

 

1. How many total number contracts do these market movers typical trade in ES? 100? 1000? 100,000? What is their inventory level? If they can move the ES, surely we are looking not at just a couple of thousand contracts but in terms multiple of 100K at lest, am I right?

 

2. How long do they usually hold their position?

 

3. Do they have stops?

[steve46 12]

Thanks for your question(s)

 

First be aware that I am limited in what I can say regarding my practice.

 

Second with regard to postion size, I will refer you to the CME for their limits...As you can see participants can move size if they want.

 

http://www.cmegroup.com/rulebook/CME/I/5/5.pdf#page=54

 

With regard to how long a inventory is held, that depends on the participant and their goals, as an example, some institutions have a charter that defines how they will committ funds. If they are required to keep all monies in the market then that is what they will do. Others have discretion to keep a certain percentage of funds in cash, or to place funds in a variety of markets (not just the S&P). As mentioned in previous posts, when institutional participants find themselves with significant profits on their books, especially at the end of the year, it is not unusual for them to agressively manage risk by "taking some off the table". They can do this in a number of ways including use of options (called "buying insurance" in the industry) or "going to cash" (thus avoiding paying for insurance).

 

Regarding stops unfortunately again I am restricted. What I can tell you is that stop size varies with participants, many of whom are using volatility based stops or have in place what you might characterize as "catastrophic" stops. For my personal account I often use a 6 point stop.

 

Hope some of this helps

Edited November 29, 2010 by steve46

[steve46 12]

Steve,

 

Exactly when is it that a sizable percentage of traders are in fact unconscious? I'd really like to know.

 

Okay, so I will answer this one with one example chart.

 

The DAX market in Germany opens and the time is 11:00pm on the west coast USA, (2am on the East Coast USA) and if you look at the chart you can see that if they decide to mark that market up or down, the bulk of the move takes place throughout the night. I think its fair to assume that the majority of folks living in the continental USA are asleep at this time. Also if you were to look at either a DOM or a Time & Sales Strip for the ES contract, you would see that it is "shallow", that is to say there less volume transacting on the Globex during this period, and yet it moves for the most part in lockstep with the DAX....

 

Frankly I don't know of a simpler way to explain this...

[steve46 12]

Based on my previous posts, I think this chart should be self-explanatory

 

Price opened and retraced down to wholesale levels, below the value area low (at 1186.50)

 

At this level, one would be tempted to take the relatively low risk entry anywhere around 84

 

Why? because the risk is limited as seen on the chart to the previous low, and we assume that participants are motivated to move this market up to defend the previous month's open at 1186.25 and eventually to try to exceed the previous week's open at 1192. If that thinking is correct, then a profit target at or near 1195 would serve as a primary target, with a secondary target about 10 points higher at 1205+

 

Of course the best laid plans are only speculation. Any news event (the Irish bailout, news about Spain, Portugal, or some other event not on the horizon) could effect the markets negatively. We will see. Finally we want to inform all readers that our comments are offered for educational purposes only.

 

Thanks

 

Good luck

Edited November 29, 2010 by steve46

[TradeRunner 10]

Hi Steve

 

Nice to see you back here.

 

My opinion is that they want to defend what they have earned so far this year (performance bonuses) and they want to do that, with as little risk as possible. One way of accomplishing that is to move markets north in the overnight, when a lot of folks are sleeping.

 

I think you are saying that the ES market is moved to an advantageous technical position overnight when volume is light and therefore easier to manipulate.

 

but then you say...

 

Also if you were to look at either a DOM or a Time & Sales Strip for the ES contract, you would see that it is "shallow", that is to say there less volume transacting on the Globex during this period, and yet it moves for the most part in lockstep with the DAX....

 

In this quote you are saying the European markets take the lead and ES follows whilst outside the US session. Why would it be less risky to move the ES overnight when you would in fact have to move the large European market - who are wide awake?

 

TradeRunner

[steve46 12]

Actually what I am saying is that whatever direction the "large" European market moves, there is going to be less resistance from a Globex market moving on low volume. The market that has the volume is going to dominate.