"Market makers in even the most thinly traded ETFs understand that the midpoint of their daily 4 p.m. quote will be preserved in prospectuses and on ETF Web sites for years to come. These market makers have a stake in attracting traders to the ETFs they trade. Consequently, they monitor their real-time bid/offer NAV calculations closely as 4 p.m. approaches. Even if they have to widen or otherwise change their spread for a few seconds, they will work to get the midpoint of their bid and offer as close to the expected 4 p.m. NAV as possible. (6) Their 4 p.m. quote is the most widely scrutinized and least useful bid/offer of the day.

Publication of this premium and discount information based on 4 p.m. ETF share quotes and NAV calculations has led to overuse of MOC orders, especially for ETFs that are thinly traded. Most investors do not realize that MOC transactions in ETFs are not reflected in most ETF reported premiums or discounts in any way. Nonetheless, MOC orders often are used by individuals and defined contribution retirement plan investors who are accustomed to buying and selling no-load mutual fund shares at NAV. Publication of this premium and discount information accounts for the fact that MOC trades account for a disproportional share of ETF trading volume."

"The point is that in fast moving markets, one needs something a little better than simple historical moving averages of daily closing prices. This is better, and extending the idea of 'volume time' vs. 'chronological time' is an intriguing direction. But one can also look at bid-ask spreads directly, or the VIX futures, or its etf, the VXX, and combinations, to gauge intraday volatility as well. Further, one can better estimate 'buy volume' using the transaction price relative to the then extant bid-ask spread, rather than if the price was weakly increasing, though this then involves syncing the trade information with quote information, and for academics such data are often hard to come by (further, quote information is often 10 times as large)."

"I have had an interest in tracking oil companies (for crude) and refineries (for oil products) trading in their own volume over the past 11 years. As I noted last week (in "Oil Inventories, Speculation, and Hedging"), anecdotal evidence is already emerging that vertically integrated oil companies (VIOCs) – those controlling the upstream/downstream process from field to refinery through retail outlet – were unusually active recently in trading in near-month futures contracts in their own product.
This occurred both when crude oil and gasoline prices were rising (through close on April 29) and thereafter, as crude plummeted almost 15% and gasoline over 13% as of the end of trading on May 6."

"As we continue to monitor the markets for evidence of Quote Stuffing and Strange Sequences (Crop Circles), we find that there are dozens if not hundreds of examples to choose from on any given day. As such, this page will be updated often with charts demonstrating this activity.

The common theme with the charts shown on this page is they are obviously all generated in code and are algorithmic. Some demonstrate bizarre price or size cycling, some demonstrate large burst of quotes in extremely short time frames and some will demonstrate both. In most cases these sequences are from a single exchange with no other exchange quoting in the same time frame."

"While analyzing HFT (High Frequency Trading) quote counts, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second: as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn't seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was a manipulative device with destabilizing effect."

"Despite the availability of very detailed data on financial market, agent-based modeling is hindered by the lack of information about real trader behavior. This makes it impossible to validate agent-based models, which are thus reverse-engineering attempts. This work is a contribution to the building of a set of stylized facts about the traders themselves. Using the client database of Swissquote Bank SA, the largest on-line Swiss broker, we find empirical relationships between turnover, account values and the number of assets in which a trader is invested. A theory based on simple mean-variance portfolio optimization that crucially includes variable transaction costs is able to reproduce faithfully the observed behaviors. We finally argue that our results bring into light the collective ability of a population to construct a mean-variance portfolio that takes into account the structure of transaction costs."

"Featuring automatic Walk-Forward Testing, Multi-monitor floating charts, symbol and interval linking, drag-and-drop indicator creation, Industry fastest, Unlimited-symbol True Portfolio-Level Backtesting and Optimization, now with Smart Evolutionary algorithms, scaling, market-neutral system support and multiple currency handling, free Fundamental data, Multiple Time-Frame support, 3D optimization charts, new Account manager, automated trading interface, volume profile, object-oriented charting, drawing layers, multi-window layouts, formula-based alerts, easy-to-use formula editor, equity function, unique composite indicators, built-in web research browser, direct link to eSignal, Interactive Brokers, IQFeed, myTrack, FastTrack, QP2, TC2000, any DDE compliant feed, MS and more..."

"The presence of new kinds of investors (with motivations and objectives different from the hedgers and speculators) has altered commodity markets. The latter are now subject to forces different from those in the periods covered by the research studies. The actions of passive index investors are new factors impacting the prices of commodity futures. I wouldn’t necessarily expect commodities to continue performing as they may have performed in the decades before the 2000s – i.e. registering average returns similar to stocks at lower levels of risk and with low correlations to stocks."

"Select the historical market data products below
Here you can select the products you are interested in. Click on the product's name to find out more about it. Press the Continue button to place an order or to get a quote."

"A still more realistic and subtle, but much more troublesome scenario: Financial Undetectable Journalistic Engineering (FUJE). Financial news journalists could word the reports differently and send very different signals to the robot army. Here're two actual news headlines re. the May NFP number (incidentally, both are from the same outlet, same day, different reporter -- just a random google search):

US adds 431,000 jobs in May, unemployment down to 9.7 pct
vs.

Despite Adding 431K Jobs, May Non-Farm Payroll Figures Disappoint
The first is factual; the second contains more in-depth analysis. It takes an experienced human to parse and reconcile the two. You can see how robot readers may assign opposite signs to each."

"Results on a commodities basket"

"I'll start by highlighting that while all the software in this post is indeed free (true to FOSS), an account with Interactive Brokers is needed to make use of it. For those not familiar with IB, they offer a trading platform that excels on numerous fronts but is most appealing to those of us who trade algorithmically. IB makes available a rather comprehensive API that makes data access and trade execution entirely possible programmatically via a handful of "supported" languages. These include Java (the language of the platform), C#, VBA and even Excel. The also have a POSIX compliant C++ version for those who enjoy C++ but dislike Windows.

For those who dislike Windows and C++, the community of IB users have a few "non-official" options. They include some nice implementations in C, Python (2), Matlab, and something even more abstracted in the trading-shim. While all well and good, there was one missing: R.…"

"… Our methods use simple ideas from signal processing and statistics, which are sometimes overlooked in the empirical financial literature. The two approaches are evaluated against benchmark allocation techniques using 4 real datasets. Our methods outperform the benchmark allocation techniques in these datasets, in terms of both computational demand and financial performance."

"While some of the anti-fraud remedies of the securities laws still apply in 144A transactions, these have been watered down in recent years by Congressional action and judicial interpretation. In a series of opinions authored first by Justice Powell and then by Justice Kennedy, the Supreme Court has steadily scaled back the scope of the securities laws. Opinions by Justice Kennedy, in particular, limited the impact of anti-fraud protections as well as the ability of investors to sue gatekeepers who play a significant role in preparing offerings."

"Now folks, it's pretty revealing when lobbyists have become so accustomed to their privileged access and backroom dealings with politicians --as went on in regards to Cheney's energy discussions, and each of the Bush tax cuts drawn up by a secretive group of GOP without any sunlight (or bipartisansip), for example, and too much with the health care bill as well--that they don't even bother to hide their scorn for the public's views and their hopes for getting that back room deal to go their way. No wonder Wall Street honchos have been so brazenly arrogant about their "entitlement" to bonuses, their rights to continue proprietary trading and hedge funds and derivatives desks--"doing God's work" says Goldman CEO Blankfein--when they are merely running a casino market to strip as much gold off suckers as possible with their "financial innovations" like synthetic CDOs that made the market many times more volatile than "real" securitizations…"

"Might there be more to last week's crash than a "fat fingered" trade, or someone mistakenly entering a "billion" instead of a "million?" An online stock trader has a video showing an unusual spike in trading volume, followed by a very quick sell-off, by funds at large investment firms BlackRock and Vanguard and some other funds 30 to 15 minutes before the big crash. Prescience? Watch the video, check the logs, and decide for yourself."

"It clearly looks as if the NASDAQ was trying to protect the interests of some institutions which lost large sums of money during Thursday’s collapse. These institutions likely did not have safeguards in place to deal with a lack of bidders. When their automated market orders hit the market in the absence of bidders, transactions were done at ridiculously low prices. But as NASDAQ has noted, there was no failure of their systems."

"In this case, the computers kicked in their sell programs and there were no buy programs engaged - and so there was no market - and stocks wound up selling for a penny a share.

Now already known as the “flash crash,” this remarkable event will almost surely put a whole generation of young math whizzes out of business as Congress and the SEC crawl all over these operations and limit this kind of insane action.

I’m all for it because, and you can call me old fashioned, I don’t think the global equities markets should be an online gambling casino which is what they’ve become with the rise of the “quants” and their hyperactive supercomputers."

"… It avoids most of the shortcomings encountered with the now classic Black-Scholes-Merton framework. Several convincing computer simulations are presented. Some of them are dealing with abrupt changes, i.e., jumps."

"If a fund/institution/High Frequency Trader generates 100mm shares or contracts a day/week/month, market observers will tell you that's a great thing because it creates a liquidity premium. In other words, because there is always someone on the other side of a trade, it is easier to match buyers and sellers and that ease creates smaller spreads and often lower pricing. On the surface that's a great thing.

It is a great thing until the market becomes completely dependent on that liquidity. If every model expects X volume, what happens when that volume falls?"

"It is at the three or four times in a 24 hour period that forex traders are well advised to switch tack and reverse near-term directional thinking. The European and NYMEX close are the U.S. based things to get under our belts, because then, maybe, the equity markets can reveal where they really want to go. Traders looking for moves outside of 06:00 and 11:00 EDT, and maybe 14:30 EDT may just find themselves sitting and waiting, wondering why they just bought the high of the day that then reversed.
As the global economy travels through the contraction phase of its business cycle the leaning is towards looking at S&P futures trade to confirm sentiment. The speculators are never too far away from the S&P in times of fear; either selling into the fear of loss, or buying into the fear of missing profits. That is the reason for so much near-term volatility, and that is how things will stay until signs of GDP expansion are seen globally."

"People forget what the markets were like in the late 1970's when the pits were dead and the average person wanted nothing to do with the US equity markets. The creation of 401k's and more gambling tables like the options exchanges helped to perk things up. This latest generation of jokers will not stop until they have trashed the markets once again."

"Norgate Investor Services provides quality end-of-day data for stock markets in Australia (ASX), Asia (SGX) and USA (NASDAQ, NYSE, NYSE Amex, NYSE Arca, OTC-BB, PinkSheets). Extensive historical data is available. Hourly snapshot data is available for the ASX and SGX. Data is provided in a "MetaStock™ compatible" data format.

Stock data is organised into security types (equities, indices, warrants, options) and can be organised into custom folders which allow you to segregate such as index participation, sector, industry group, dividend-paying-shares. World Indices are provided free with any subscription."

"I got my data from Norgate Investor Services, (the same folks that provide my end-of-day feed). They only charge a one-time fee for the delisted data, while some of their competitors charge as much as 3x Norgate’s one time fee with the charge recurring annually!
Since adding the delisted database, I have not noted any great differences in the historical results of the systems I work with. I have stated a few times that it is my belief that short-term systems that hold stocks for a few days to a week are not likely to suffer greatly from survivorship bias. So far, this belief is proving to be true."

"The top performers of 2009 thus far can basically be summed up with the acronym BRIC. This stands for Brazil, Russia, India, China -- the 4 countries that many perceive to be the "future economic superpowers". Such popular single-country ETFs as Russia (RSX), Brazil (EWZ), and India (WPI) (PIN) are near the top of the list. Several Asia region ETFs are spotted, many ex-Japan. Another region that is represented is Latin America, through the (ILF) ETF. A couple of other smaller country names appearing on the list are Thailand (THD), Austria (EWO), and Israel (EIS)."

"If anyone is interested in chatting about what makes a fund a more "successful business" drop me a line. Getting more AUM (assets under management) is the goal of most funds. The maintenance fees of 2% are ridiculously high.

The magic threshold in the business is $100m AUM with +36 months of exposure because these are the operational levels, where most institutions start looking around at allocations. Please note instituional sales cycles for allocations are 9-12 months, while family offices are estimated at 12-18 months."

"What I mean by this is that over enough trades, it should not matter that the historical sequence of trades does not match exactly the real-time sequence. Regardless, it is something to keep in mind when comparing historical backtested data to real-time."

"Below are the 20 hottest ETFs (excluding leveraged funds) at the end of August, based on the 6 month performance. Data excludes leveraged ETFs and the data source is FINVIZ.com. The theme? Financials, unlike last month which featured China as a staple. A link is available on the right hand side of Scott's Investments with this data updated monthly."

"While you can place some blame on high frequency traders for skewing the data, Business Insider points to week-to-week performance benchmarking as one culprit. Our sell side experience leads us to agree, even monthly performance benchmarking is ridiculous for measuring fundamental investing given the vagaries of the market in the short term. The result is that a lot of fund managers have no choice but to engage in speculative trade-chasing covered by heaps of fundamental BS to maintain their firm's fundamental, disciplined image."

"The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee."

"Harry Markowitz, 81, who won the Nobel Prize for economics in 1990 for his work on portfolio theory, says that last year’s collapse reinforces his view that even the most unlikely outcomes are possible in any year. “The thundering herd is still with us,” said Markowitz, a professor of finance at the Rady School of Management at the University of California, San Diego. “Nature draws into a bushel basket full of returns and finds a next return every year, and I believe there’s another 1929 somewhere in that bushel basket. 2008 was not a refutation, it was a confirmation.""

" The U.S. Geological Survey (USGS) provides information to the public and to policy-makers concerning the current use and flow of minerals and materials in the United States economy. The USGS collects, analyzes, and disseminates minerals information on most nonfuel mineral commodities.

This USGS digital database is an online compilation of historical U.S. statistics on mineral and material commodities. The database contains information on approximately 90 mineral commodities, including production, imports, exports, and stocks; reported and apparent consumption; and unit value (the real and nominal price in U.S. dollars of a metric ton of apparent consumption). For many of the commodities, data are reported as far back as 1900. Each commodity file includes a document that describes of the units of measure, defines terms, and lists USGS contacts for additional information."

After hearing several testimonials recently.

"Unfortunately, the average investor does not understand the math involved to know what the rebalance is doing to their capital, and they don’t know that since these funds rebalance daily, they need to rebalance almost daily, as well.
The bottom line is that these are good tools and have lots of advantages, but investors really need to understand them before diving in head first."

"We saw this sort of "favored garbage" all the time in the 90s. As a consequence Regulation FD, for "fair disclosure", was passed. It mandates that you cannot issue information that is material to your stock price to only a few select people - you have to give it to everyone at the same time, and the most common way you do this is to request a halt on your stock from the NYSE, issue the press release, then have the NYSE lift the halt.

This way nobody can get either long or short in front of your announcement and nobody gets to profit unfairly (or get screwed unfairly) as a consequence of whatever it is you need to announce."

"In short, leveraged ETFs, as assets increase, represent a new source of systemic risk in the market as their managers rebalance them at market close every day."

"Two months ago, we wrote the article “Colocation and the Financial Industry” to summarize the growing demand for outsourced colocation services, especially from the Electronic Trading Community.

It may now be worth a little follow up, not because the landscape described has really changed, but to update our readers with a few events that have happened in the meantime."

"The point of these two examples is to say that, at this moment in time (subject to change with a portfolio-crushing lack of notice) short-term mean-reversion is the stock market play du jour. Not respecting this shift in the markets and following the CNBC’esque view of the world (the market rallied today, the bottom is here!) is quite possibly the easiest way to underperform even the sad saps on Wall Street."

"Governor Patterson said it best when he stated that most swaps are used by speculators and for “destructive speculation” that damages “the health of targeted companies.” The proposed clearinghouse will mostly be used for naked credit default swaps and will be the biggest and most technologically advanced gambling joint in the world. And, the destructive impact of naked credit default swaps will grow.
Rather than facilitating the casino mentality that has almost ruined the economy, the SEC, CFTC and other state and Federal regulators should be outlawing naked credit default swaps as gambling contracts and regulating hedging credit default swaps as insurance contracts. And, New York shouldn’t have abandoned its effort to regulate these derivative contracts."

"I want to focus on the metrics of the strategy trades. The performance statistics are below. I find them nothing less than stellar. The metrics that I found especially appealing are highlighted in green."

"A logic question. Which financial professionals would be more likely to be audited: bad ones or good ones? Logically, I would say good ones – if you’re bad, you want to hide it – if you’re good, you want to prove it. Now I’m not saying all audited professionals are good, or all unaudited professionals are bad, but on par I think it’s fair to say that audited professionals are better."

"Refining a new mechanical trading system and ran a series of backtests with and without a profit stop. As the post title states, this system uses four degrees of freedom. "

Best money quote for some time:

"There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot."

"Altruistically, we want to be the good guys. This industry is rife with charlatans and snake oil salesmen, touting their successes and conveniently forgetting their failures. We want all of the strategy developers we grow through Timer Seeds to succeed the right way - on the back of strong audited track records. This improves the legitimacy of our industry which (a) makes us feel good because this is what we do for a living, and (b) encourages more investors to employ market timing.

There's also a profit-motive. We spend a lot of time working directly with our timers sharing our hard fought experience and we stake our reputations on their work. In exchange, as is customary in this industry, we receive a percentage of the compensation from any contracts we negotiate or introduce. This is a very transparent process and our timers always have the absolute final decision on any contracts involving their strategy."

"The next frontier may turn out to be options strategies associated with these 3x and -3x ETFs. All eight of these ETFs are optionable and options activity seems to be picking up rapidly, particularly in BGU, the large cap 3x bull ETF, which currently sports an implied volatility of about 150 and a historical volatility in excess of 200."

"Timer Seeds is a small group of timing-industry professionals (either strategy developers like me or sales/marketing) with an idea that goes something like this:

No matter how good we are at developing strategies and managing money, there are unsung developers out there, laboring away in their basements, that are even better. But because they lack either the ability or the time, their strategies never ever leave that basement. They never make the transition to becoming a professional strategy developer.

And based on that vision, we launched Timer Seeds. We find developers, take the required steps to make their programs marketable, and then place their programs with investors, financial advisors, hedge funds, and other industry professionals. The developer receives a percentage of assets under management, something that can become very lucrative for very good programs."

"Many investors believe that ETFs, especially the ultra or 3x funds, such as Direxion Shares ETF Trust Large Cap Bull 3X (BGU), are to blame for the roller coaster ride in market volatility that is being seen on Wall Street. This is actually not the case.
A research study conducted with data from LakeView Asset Management LLC, suggests that it is in fact futures that influences the activity of speculators and hedgers and therefore is the indicator for market volatility and manipulation, states Scott Rothbort for the Street.com."

"Obviously, given the 40%+ decline in major indices and close to double that for Financials, if you pick the bottom, you can realize an enormous return on the way back up. Do you think oil's headed back to $100+ when the global economy recovers? Then, ERX is the trade for you! However, picking the bottom is an act of god, so you'll definitely want to inject some caution and pragmatic thinking into your strategy.

There are various pairs/combos you can use for these. For instance, you can go long 3X with puts to create a neat hedge model, or you could use the 3X inverse to hedge the more significant long portion of your portfolio."

"So, once again, by popular demand, here is our newest list, The Complete List of Commodity ETFs and ETNs, as of October 20, 2008."

"Flight to quality? Some real hedge funds are positive for the year even when the aggregate returns for the industry are negative. Performance dispersion is enormous in such a diverse universe. Several strategies have not been affected by prime brokers imploding, changes in short selling rules or the leverage lockdown. The best managed futures CTAs, global macro and options traders have been generating absolute returns throughout the equity and credit mayhem. Strategy diversification is so important since forecasting is difficult. Transitions from one market regime to another often requires a financial revolution."

"Hedge funds are preparing to return between 10 per cent and 50 per cent of their assets under management to investors who want their money back at the end of yet another quarter of dire investment performance.

One prime broker said: “Many funds will have to close. There were a flood of redemption notices at the beginning of the quarter but many investors said they wouldn’t actually withdraw the money if performance improved. It hasn’t.”

One hedge fund said: “We’ve produced 15 per cent returns for 10 years. This year has been bad and our funds under management have been reduced from $2billion to just $300m. This is decimation.”"

"From time to time you have to kill a management team to encourage the others."

When scientists do money

Surprising efficiency in minerals market price discovery among space colonists, pirates and other inhabitants of EVE.

Paper explaining results of SEC's pilot test of limited SHO short-sale price-test removal.

It may have an effect on the underlying dynamics of market prices... but it seems like a rule of decreasing importance as the tick resolution of trading increases.