Trader’s Narrative

The chart below is from James Montier. It shows the average holding period for NYSE stocks (expressed in years) from 1920 to today.

Montier is an economist and global strategist who uses behavioral finance to make sense of the financial markets. He started his career at Dresdner Kleinwort, moved to SocGen and just recently moved to the hedge fund world. Montier has written several books, among them, Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance.

I’m not sure where exactly Montier got the raw data for this graph but considering the caliber of research he does, I’m assuming it is an accurate reflection of the underlying change in the structure of the market over time. The chart is remarkable in setting out what we all intuitively know to be true. Driven mostly by high frequency trading, we’ve seen an explosion in advance decline volatility.

It seems I was wrong, when I said this isn’t your grandfather’s stock market. This is exactly your grandfather’s stock market. Indeed, your grandparents would readily recognize the sort of stock market we’ve had recently. What I should have said is this is not your father’s stock market (1950’s - 1960’s) where people actually invested by holding stocks for years at a time. In comparison, what we do now is push buttons with the attention span of a housefly:

Source: James Montier formerly of Société Générale

It is absolutely remarkable to notice that the turnover in 1929 - a time where trading was done over telegraphed message or scribbled notes and hand gestures - is equivalent to recent times when trading is done by blazing fast computers interconnected directly via FIX to the exchange.

If you enjoyed this, don’t miss Montier’s brutal take down of EMH (via John Mauldin’s Investor Insights). Also, in a world where we are all traders, the least we can do is be better traders:

• Why do traders fail?
• How to Fail as a Trader in 10 Easy Steps
• Dennis Gartmen’s Rules of Trading
• The Definitive Guide to Trading Mastery & Success
• 5 Fatal Flaws of Trading

Before the SEC could make their move, BATS and Nasdaq decided to ‘voluntarily’ stop flash orders. As alluded to before, this is a good development because it returns us to a state where all participants on the exchange have equal access to information, without any heavy handed regulatory action.

For more economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all go to news.tradersnarrative.com:

• Say goodbye to flash orders
• The Great Missed Opportunity of 2009
• No, The Price Is Not Right
• CNBC Concerned About Australian Camels
• Get a FREE Subscription to Financial Magazines
• Chinese markets have become a giant Ponzi scheme
• Kass: Dousing the Fire With Kerosene
• Has the Gold Bull finally arrived?
• Lessons From Irwin T. Yamamoto
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Turtle Trading using Excel Spreadsheets
• What’s the beef with high-frequency trading?
• Old Banks, New Lending Tricks

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead: Fed Meeting & Retailer Earnings

The big debate within Wall Street now is not over huge bonuses but instead over high frequency trading and flash orders. The issues surrounding HFT are complicated and require a careful balance to be struck between the need for continued innovation, liquidity as well as price improvement and on the other hand, equality, transparency and prevention of system wide risks.The issue is complex but it can be boiled down to one question: is the exchange ensuring that every single participant has equal opportunity and access to the same information?

I stopped watching CNBC years ago but every once in a while friends send me a link to one of their online videos like this recent one about high frequency trading and I’m reminded all over again why I don’t watch CNBC:

This is exactly what is wrong with CNBC. They spend more time designing and perfecting their chyrons and the makeup and hair of their hosts and seemingly none at all actually researching or understanding an issue. You know, that thing we used to called journalism. In the end what could be an enlightening and intelligent dialogue about an advanced function of the financial markets deteriorates into childish ad hominems.

The debate over high frequency trading reminds me of the controversy a few years ago when large institutions were able to transact in mutual funds units after the close. By getting yesterday’s price, that is buying after knowing the market close, they made millions of dollars. Until they were stopped.

Flash orders, per se, are not evil. Actually, they are quite useful and regularly allow large traders to get better prices than they would normally get. Here is a diagram illustrating how they work. The problem is that we now have opportunistic computer algorithms which out-trade the slower and larger institutional traders. And this segment of the exchange volume has exploded in recent years. The exchanges love it because it increases their volume traded and they get paid co-location fees for housing the computers that power the myriad instantaneous trades.

So it isn’t difficult to see the dilemma. It is the same one that faced the SEC recently when they looked at the regulations surrounding short sales. Finally, the SEC moved to fix naked shorting, a big problem. Hopefully the rest of their regulatory modifications will be the scalpel type - not sledgehammer swings.

Here are a few recently articles which explore the issue of high frequency trading:

• How to Understand High Frequency Trading
• Stock Traders Find Speed Pays, in Milliseconds
• We Fear What We Do Not Understand
• Demystifying High Frequency Trading
• High-Frequency Traders Say Speed Works for Everyone
• SEC Pressured to stop HFT

You can find many others at news.tradersnarrative.com (check in as interesting links are added regularly).

Here’s a short video discussing high frequency trading and flash orders, which is refreshingly nothing like the CNBC clip mentioned above:

Tabb is a contributing editor at Advanced Trading magazine and because of his day job, he comes at this issue with his own biases. Although the interview isn’t as polished and has lower production qualities, it is still infinitely more rewarding listening to Tabb than to the screechings from CNBC.

Well, that didn’t take long! We’re back to the status quo faster than you can say Government Sachs. Crisis wasted? or crisis averted?

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all go to news.tradersnarrative.com:

• Count Your Money, Not Blessings
• Michael Lewis Thinks Bashing Goldman Sachs Is a Game for Fools
• Benefits Abound For Active Traders Who Incorporate
• Five Firms Hold 80% of Derivatives Risk
• Get a FREE Subscription to Financial Magazines
• How to Understand High Frequency Trading
• The Perils of Trading as a Victim
• An Arrrrgh!-conomic Analysis of the Somali Pirate Business Model
• Inside Goldman Sachs
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• The $100 Million Bonus Man
• A Critical Look at the Baltic Dry Index
• The psychology of overconfidence

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead:

For economic and market news and to see what you may have missed last week, check out the list below. It is a small sample, to see it all go to news.tradersnarrative.com:

• How High Will the S&P Go?
• A Colossal Lack of Judgement
• The Next Big Technical Pattern
• Get a FREE Subscription to Financial Magazines
• An Anthropologist’s Take on What’s Wrong with Wall Street
• Fed Jawboning And Market Performance
• The 500 Millisecond Advantage
• Charles Kirk Q&A with Larry Connors
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Marc Faber - turns bullish short term (!)
• Cramer’s Latest Sleazy Marketing Pitch
• Charts of the Demand/Supply of Crude Oil
• Thoughts on the Changing Demographic Face of Trading

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead: