Trader’s Narrative

Last year when InstantBull.com came out, I wrote a somewhat negative review. I was a bit miffed that it jacked my browser and I didn’t see a point to its nature as an aggregator.

I’m glad to see that InstantBull no longer jacks browsers but I still can’t see the point of sites like MyTrade.com or SaneBull.com which are simply clones of netvibes, iGoogle and other superior offerings out there.

I look for the value added but can’t seem to readily find it. Anyone can set up a similar page without using their services, so why wouldn’t they? But I’m rethinking InstantBull’s value added. For someone who is new to trading blogs, it offers a great way to stumble on a whole pile of them. And for those who are still scared of RSS and setting up a reader, it can be the next best thing.

The only short coming is that it doesn’t allow for you to add your own RSS feed. So you can’t make a customized list of blogs to read the way you could, say with Google Reader or Bloglines.

But Gal (its founder) has added a few interesting but simple features which do add value.

You can search trading messageboard threads by stock ticker (symbol). Its a good way to stay on top of what is being said about a stock. But I wonder why Gal doesn’t include elitetrader in the messageboards he searches? It is the grand-daddy of them all. Maybe there’s a technical reason, but all the same I’d recommend he look into this.

And now, you can now rank all the blogs according to their Alexa (traffic) and Technorati (incoming links) ratings. So at a glance you can find the most popular trading blogs. Another way Gal could rank the blog would be according to their RSS readership numbers.

Of course, just as in high school, popularity doesn’t necessarily mean quality. But all the same, being a hyper competitive SOB, this new feature speaks to me

I’m pleasantly surprised to find that Trader’s Narrative is in good company being in the Top 10 according to Technorati and Top 12 according to Alexa.

Here are three places where you can chat with traders live during the day:

WallStreak
This is the newest one! If you’re familiar with twitter/jaiku you’ll be off and running with WallStreak in no time. I’m really excited about WallStreak - not only because Ugly is my friend and I want to see him succeed - but also because it uses new technology (ajax as opposed to java), is new and hungry, is open to suggestions, has introduced many new & exclusive features. Give it a try and contact Ugly with your feedback and suggestions. Developed correctly, this has amazing potential as a trading tool.

DehTrader
Glenn over at dehtrader.com has his own chat where a good number of traders hang out every day. They are a very friendly and helpful group. My only gripe is with the technical side of things: it is java driven and has a tiny screen size which makes you have to scroll to see what was said a few minutes ago. You can register or not, as you prefer.

EliteTrader
For some reason most people who know elitetrader, don’t know it has its own chat room. The last time I was there it was a mix of calls, commentary and some really childish banter - but that’s to be expected since it is a large group. Elitetrader’s chat doesn’t allow anonymous participation so if you need to register. On the plus side, they provide a daily log so you can go back and review it like a transcript.

There are also many IRC channels dedicated to trading. Some are public but most of the good ones are private, invite only clubs. If you know of any good IRC channels, drop me a comment.

My ideal would still be an audio setup with a relatively small group of traders but I’m beginning to be won over to the text based chats. I think there is great potential - we aren’t there yet but with some new adjustments and tweaks it can be a very good medium.

I’m a bit surprised that there isn’t more discussion regarding the impending elimination of margin rules under Regulation T. This has massive implications for not only how the market will work in the future but also its direction.

The rules under which margin or credit is currently extended by brokers to their clients has been in effect since the outrage that followed the crash of 1929. Regulation T, instated by the Federal Reserve, applies a fixed rate of margin (50%) to securities accounts. And although it is among the 3 mechanisms by which the Federal Reserve can manipulate the amount of liquidity in the financial markets, it has never really been used. The most famous example of it not being implemented was in the late 1990’s when Greenspan repeatedly refused to up this rate to dampen the ‘exuberant enthusiasm’ taking the Nasdaq parabolic.

This rule will be replaced by an alternative system, initially suggested by the NYSE and approved by the SEC. Known as ‘Portfolio Margining’, it is primarily motivated by the NYSE’s battle against an eroding market share in the international financial markets arena. The new system is a stark contrast to the simple fixed rate of the old, being a rather complex calculation that takes into account hedging and offsetting positions between any number of financial instruments including: all margin eligible securities, listed equity options, listed equity futures contracts, and OTC derivatives on equities. As IB puts it, with “Portfolio Margin, margin is based on the largest potential loss found by valuing the portfolio over a range of underlying prices and implied volatilities.”

Don’t quote me on this but depending on the situation and portfolio, I’ve heard reports that a large hedge fund will find itself able to increase its leverage anywhere from 2-10 times more than before. And for retail clients, here is a brief example offered by ‘mskl’ on elitetrader.com:

In one of my accounts I mainly have Conversions/Reconversions.

My current Reg-T margin requirement is over $350 K. With Portfolio Margin - I will be charged the minimum per option contract (about 600 options X 37.50) or $22,250 - no direction risk or volatility risk

A Micro Example:

Long 1,000 shares of IBM at $104

Short 10 APR $100 Calls
Long 10 APR $100 Puts

Under Reg-t - My Margin requirement would be $52,000. Under Portfolio Margin the requirement would be the minimum or $750 (20 contacts x $37.50) a decrease of almost 99%

Not every broker will be offering the application of the new rules immediately and not every broker that applies it will do so equally to all their retail accounts. So call your broker up and ask them for details. I know that my broker, Interactive Brokers, will be offering the new rules on April 2nd 2007 - the same day they become effective. But only for accounts that have $100,000 US or more in Net Liquidation Value and apply for a “Portfolio Margin upgrade”.

I don’t think it is difficult to imagine the consequences of such a rule change. The financial markets are extremely complicated though, so I have no idea whether the Federal Reserve (or the PPT) will be monitoring this and extracting a commensurate amount of liquidity as an offet. Also, this new rule has been in the works for sime time, so the market has had ample time to digest and adjust itself ahead of time. I still see it as a positive for the market (long term) but only one of many cross-currents.

Clients of Interactive Brokers can find more information here about the new ‘Porfolio Margining’ rules and how they are calculated. And here, you can find a Deloitte brief titled: “Historic Change in the Leveraging of Securities Purchasing: The Advent of Portfolio Margining” (pdf).

On a totally different note, if you have a trading blog, don’t miss my first trading blog contest!

The recent price action in Accredited Home Lenders (LEND) reminds me of “the Great New Pattern” invented by praetorian2 (aka Harris B. Kupperman) over on elitetrader.com

The pattern is massive capitulation by the longs marked by sustained selling. The key factors are not only back to back price delines but seeing a decline accelerate (wider range candlesticks to the downside). Volume is also an important factor since it tells you how more and more longs are getting sucked into the selling by having their stop losses triggered or just panicking.

At the maximum point of anxiety, you watch for possible reversal. And at that first glimmer of light, you start scaling in. Kupperman actually scaled in as price was falling, anticipating the V bounce. This is very risky but he had made this pattern his own and knew instinctively how to lower his basis point without getting his head chopped off. The exit strategy is also piecemeal, if I remember correctly.

Here’s an example from the archives (way back in 2001):

For more information, on this set up check out the original thread on the GNP by praetorian2 and this follow up one by Robert Tharp.

We hear a lot that success in trading comes from finding your own way. This is a great example of that. Since Harris first ‘found’ this pattern it has continued to be repeated over and over again in the markets. And by consistently playing this setup he went on to great success as a trader.

Last I heard, Kupperman is still running his hedge fund, Praetorian Capital Management (with an offshore clone), and has assets of ~$6 million under management.

An interesting bit of drama played out a few days ago inside the EliteTrader messageboard. After becoming a paid sponsor, Traders International started posting about their star trading teacher Franz Shoar (Faramarz Vahdatshoar).

At TI, Franz, was supposedly trading the spoos live, and pulled in hundreds of thousands of dollars a day on average. For a fee, he was willing to teach anyone by letting them look over his shoulder. As you can imagine, that got a lot of attention. Finally, the man himself came and told everyone that he would be happy to answer any and all questions. That really got things going.

Especially since it had already been revealed that Franz uses a counter-trend strategy and simply doubles down. Some piped in that they knew all the big players in the spoos and Franz, definitely was not one of them. After all, the kind of size that he was throwing around gets a trader noticed.

People started to suspect that it was trading but trading on a simulator and that Franz was flat out lying. It didn’t take too long for the whole thread to deteriorate into juvenile ad hominems. But not before there were some very polite and coherent comments. Some astute trader mentioned that TI and Franz were probably going to get a visit by the CFTC soon.

Lo and behold! We were told not soon after that yes, Franz was on a simulator. Those dollars that he was throwing around were just digits dancing on the monitor and were not really in play.

Next thing we know, Franz “retired”, due to bad health; TI’s website was overhauled and all mentions of Franz excised and the threads on ET were also erased. Oh and this new Yahoo! Group was created by a whistle blower from within TI to organize legal action against Franz and TI.

If you’re a vendor, the moral of the story, is to watch where you tread. The same medium that allows you to market your services so freely and inexpensively can be used against you. Venture into ET to make outlandish and fraudulent claims and you might very well get your lungs ripped out.

Finally, I can’t leave this topic without mentioning the role of the financial press. TI bought an advertorial (an ad that looks like an article) on SFO and Traders World Magazine did a fawning piece on Franz. I hope that this whole sorry episode can serve as a wake up call for the them and their peers so that next time, they don’t think that due diligence is just pretty sounding legal jargon.