Market Data Trader

I spent last weekend in Chicago with a large group of traders.  It was a wonderful group, quite an international group.  We had individuals from Germany, China, Taiwan, Switzerland, Croatia, and more.  I was pleasantly reminded that there ARE individuals out there who have exceptional trading skills and manage themselves just fine in the financial markets.  This blog entry is dedicated to the retail trader.

On the brokerage front… my favorite retail broker remains thinkorswim.  PFG was popular with many of the traders.  I also think quite highly of Interactive Brokers.  Rumors of a high frequency service for retail are out in the press. 

In terms of markets… the crowd was largely focused on simple approaches towards US futures markets.  Very few even understand options strategies.  Little have interest in stocks and even claim that stocks are harder to “grasp” than commodities.  They all seem to be smart enough to stay away from the “forex” buzz.  And, I didn’t run into anyone who was playing around with any thing too complex or exotic such as high-frequency or exotic derivative or complex interest rate products.  Very few intraday traders were represented.

Popular references from the weekend:

• Ralph Vince
• Larry Williams
• Tom Demark
• Lee Gettess

Just back from Vegas.  Some morning reading and comments:

• Aspen Graphics – small Colorado company specializing in trading software moves to Silverlight
• Last week I was working on a white paper on the Quant Finance Industry and was scrambling to come up with a good section on Portfolio Attribution.  I was surprised to find ClariFI has some nice portfolio attribution functionality built in.
• Team Foundation Studio 2010 introduces User Stories as a basic work item in the Microsoft Agile 5.0 template!  Now, the pressure is on development teams to start from the scenarios and really work their way down to the individual features.  This page has a very literal, screen first, approach to the user story.

• After catching up with some colleagues who returned from WPC in Washington, D.C. last week, the story remains: Azure, WP7, Dallas, OData.  I was surprised there wasn’t more on the SQL Server 2008 R2 Parallel Data Warehouse or Stream Insight.

MEF is fantastic!  I was fortunate to get an introduction from Glenn Block a few months back and have been playing with it ever since.  Today, I discovered the significance of the NonShared Part Creation Policy, which was covered in the original February 2010 MSDN Magazine article “Managed Extensibility Framework: Building Composable Apps in .NET 4.”  This came in really handy when working on a workbench that allows users to instantiate multiple instances of the same tool and I want each View to have it’s own independent ViewModel.  Very cool MEF team!

If you are interested in High Frequency Trading (HFT), you better get to know Complex Event Processing (CEP).  I suggest taking a look at Streambase’s site.  They have some good recorded web casts and white papers.  They’ve been at it much longer than anyone else that I’ve come across.  If you have the dollars to spend, they seem like the premium solution.

Very cool space emerging there.  I’m looking forward to watching the CEP industry mature.  As time allows, I will explore regressions on High Frequency data sets.  Fun!

I’ve long believed that scripting languages are an integral part of any legitimate Quant platform or strategy development framework.  First I started playing with Matlab, using M as script and Java as a host to my QuantPipes trading platform.  Later, I messed around with GroovyScript.  But, now that I am entirely committed to the .NET platform, I’m playing with dynamic languages such as IronPython.

At first blush, it has everything I was looking for.  It took only a couple hours to come up to speed and get a scriptable widget dropped into my latest trading framework that enables me real-time control of the underlying libraries.  Great job Microsoft!  They are doing some powerful things with the framework.

I made it to the kick off for the Summer Series for the Silverlight User Group focused on Windows Phone 7.  Here were some of the highlights:

Hardware specifications:

• Capacitive Touch: 4 or more contact points
• Sensors: GPS, Accelerometer, Compass, Light, Proximity
• Camera: 5 mega pixels or more
• Memory: 256 MG RAM or more
• GPU: DirectX 9 acceleration
• CPU: ARMv7 Cortex/Scorpion or better
• Resolution: 800 x 480

It supports Silverlight 3+… which means everything in Silverlight 3 is in the phone with two primary differences:

1. They optimized the heck of the library as they have the guaranteed GPU which isn’t the case when running Silverlight in the browser.
2. Security model is different on the phone… it’s equivalent to “out-of-browser” / “elevated trust”

Misc notes:

• You can not run a Silverlight application in the browser on WP7
• You have access to storage
• Everything installed on the phone MUST be installed through the MARKETPLACE
• Tools are free
• You can install the Windows Phone Developer Tools along side your current installation
• Emulator is an EMULATOR, not a simulator, it’s the real thing
• Emulator supports landscape mode
• You have full debugger support
• Can just plug in a phone and debug on it
• Registered developers get 5 free apps and unlimited commercial apps that can be published to the marketplace.
• Split is 70% you and 30% MS and providers on app sales
• You can write your own subscription models or advertising engines… anything goes… except working around marketplace for application updates

The new bits are out.  I managed to complete my first WP7 application.

The US Dollar is as much a focus for me this week as it has ever been.  It is starting out the week testing it’s latest lows.  Some quantitative research I’ve done has been me focused on possible meaningful dollar bounces starting as soon as the end of this week.  Not to mention, the tightly wound up correlation between so many markets: gold, energies, indices, bonds, and dollar, still has my curiosity peaked.  So, pretty much the dollar is the key to much of my trading activity for the week.  If the dollar holds, perhaps I’ll engage some markets.  Otherwise, I’ll stay on the side and let the current trends continue to run their course, a course that is no longer interesting to me for a myriad of reasons.

I’ve lost the illusion of sensing I can see good opportunities on the grain markets.  And, the softs seem a wee bit off kilter for my tastes.  So, I’m pairing my focus at the start of this week to metals, currencies, and indices.

Options traders remember we have expiration coming on Friday!  The next expiration will be December expiration at which point the smarter trading community will already be taking position for the new year’s trend.  It’s not too early to start thinking about 2010.  This markets may be able to run higher, but, not forever.

While I’m on the subject of options, keep in mind what sort of traders will be rewarded this expiration.  Let’s just assume our more sophisticated traders are using rather dumb market neutral strategies.  Let’s assume the more naive players have a directional bias.  So, roughly speaking the majority of “smart” trades would have gone on around October 16th.  Let’s assume sometime around 10-15 days into the trades, IF AND ONLY IF, they were profitable, they would have taken them off.  Otherwise, smart money would be looking for those markets to be within a similar price range as we close out those contracts which will expire this week.  At which point those markets will be free to explore new ranges in ways they haven’t previously been able too.  One market near and dear to my heart is the metals market.  If this logic pans out, I could see perhaps one more sucker’s rally before a decent breather.  Time will tell.

General outlook:

As always, this is purely an empirical and a theoretical exercise.  Trading is extremely risky.  If you were to trade, you should only ever do so with money you can afford to lose.  Be well, be safe, and be warm.

Albeit it’s still seasonal prime time for gold.  There should be many great weddings in India, drowning in gold.  And, heck, I agree with the scathing write-up on ZeroHedge about why this isn’t the blow-off top on gold.  Regardless, I’m still a bit suspect of this market.  There are a few things I want to say on the subject:

• The price of gold can come down really fast.  If you haven’t been long gold past a top before, you are naive.  This is a speculative market.  It’s a small market.  And, when it is time for it to take a break, watch out.  I remember being with a bunch of trader’s in Vegas during a metals run a few years back.  Sometime during day two of our stay the market turned over.  It ruined the visit for a number of new friends.  In short, don’t fall asleep at the wheel.  Just like any other market, this one is prone to sharp corrections.
• We’ve come a long ways.  We are up about 30% since April.
• I’m seeing signs of technical divergence surfacing on the price charts.  I’d go into more detail.  But, in this case, the technique I’m using is not published.  It’s not one I came up with.  But, it’s really not mine to share presently.

I’ll I want to say is be very weary of your long positions.

Even better than some general advice, let’s take a look at some recent history so you can get a feeling for 4th quarter gold prices:

Gold at the end of 2004:

Gold at the end of 2005:

Gold at the end of 2006:

Gold at the end of 2007:

Well, that’s 4 out of 5.  In 2008, gold had started a significant pullback earlier.  It was not up to it’s usual self.  Needless to say, this year’s market is set up for an opportunity here.  But, I am definitely not encouraging anyone to be shorting gold at these levels.  Just because the opportunity may be there, it may not be the smartest trade.

Nice wedge on the US Stock Indexes.  I don’t care, take your pick: Dow, Nasdaq, Russell… from my view of the world, it’s one and the same.  But, looking at the journey from our top in October 2007 to our low in March 2009, we are about halfway home… not quite though… and take a look at the gorgeous wedge that has come together here.

It’s Sunday evening and the futures markets are testing Friday’s highs.  I love it.  That’s encouraging for the bears in the neighborhood.  I’d be looking at an opportunity to catch a short on the equities Monday through Wednesday of this week.  Of course, a big part of this observation has to do with the risk/reward.  Although new highs in equities is somewhat hard to imagine, new lows in the Dollar isn’t.  So, as always I’m quite likely wrong.  So, if you find yourself short the market and hitting new highs, get out.  Big picture: this looks like as good a risk reward as you could look for on a trade and the markets are heading towards halfway home… perhaps it’s time for a break.

The higher the markets go, the sicker I feel.  No that’s not quite it.  I did catch a cold over the weekend.  And, I am actively monitoring price action.  If I see any really strong opportunities that stand out, I will call them out.  Otherwise, it will not hurt to sit tight for a few days, as post-fed and post-unemployment the market clarifies it’s current conviction and direction.

If you must trade, there are a couple key markets ripe for some straddling, coffee and cotton are at the top of that list, with markets like sugar and indices not too far behind.  But, the big picture, the dollar is really weak here.  I’d advice to watch this play out.  We could quite likely take 2-5 days for the dollar to clarify that it is going to take on lower levels.  In which case, step aside and watch the foolery ripple through the rest of the markets.

Don’t expect much activity this week as I work off this cold.  Meanwhile, stay warm and keep your capital out of harms way.