Link: How Large Traders Sneakily Disguise their Actions

Sep 4, 2007: 11:14 AM CST

Do you want to know what the “Big Boys” are up to in the Stock Market?

It has often been said that if you follow the “Big Money” or “Smart Money,” then you will often have a greater chance at success in the stock market.

Some traders profit entirely off of reading “insider trading” reports of actions by company leaders, or large traders, and there are various sources to find this information on your own.

However, the true motions of the large traders are disguised very cleverly and professionally, and are designed to throw smaller traders directly off their paths. Such actions lead to false moves, false breakouts, and conditions that are worse than ‘noise’ because they send false signals that traders act upon courageously.

Dr. Steenbarger recently watched early morning trading in Apple (AAPL) and posted his thoughts in “How Large Traders Disguise Their Actions in the Stock Market.” His post is in reference to a developing four part series by “BZB Trader” in the initial post, “NYSE and the Retail Trader” (browse around the rest of the site – there are some good insights and examples). Check back to see when the series will be completed.

The principle is that larger traders use sophisticated software to ‘break down’ their larger positions into extremely small positions that mimic the behavior of most retail traders (in terms of taking positions of 100 or 200 shares at a time).

Dr. Steenbarger notes:

“Over three-quarters of all first-hour trades were 100 shares. Of the small, 100-share trades, I estimate that about two-thirds were part of larger trades that were executed in pieces by specialized software.”

In addition, here are two charts taken from the website NYSEData.com, a site that details various statistics about the trading day’s action. Data from these charts come from the close of the trading day August 31st, 2007.
In this case, I will show two charts:

A listing of “Program Trading” statistics:

programaug31.jpg

Next, a listing of Retail Trading Statistics:

retailaug31.jpg

Let’s look at two comparisons:

Total Program Volume: 942,827,100
Total Retail Volume: 37,592,563

Total Program Trades: 3,203,424
Total Retail Trades: 120,209

Program trades occur significantly higher than retail trades – there is no comparison. Retail trades accounted for 3.75% of all trades on August 31st, 2007.

Program Trades are executed by some of the most sophisticated software presumably by some of the most sophisticated traders who trade millions of dollars on a daily basis.

Dr. Steenbarger asks the question: “What is the effect on the TICK and other market internals?” as a result of ‘games’ played by the Large Traders?

I have never been successful in reading intraday volume flow on a ‘market pulse’ basis, and have always fared poorly at the “Time and Sales” screen. About three years ago, I wrote in my trading plan “Never view the Time and Sales screen and never view the one-minute charts.” I only allow myself to view the 5-minute charts and I try not to focus on action ‘at the heart of the market.’ I try to make myself see a larger picture while still being close to the pulse but above the price manipulations and deceptions from larger volume traders. I was glad to see this report and analysis from Dr. Steenbarger and BZB Trader.

I look forward to seeing what both gentlemen discover from their research in this area.

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2 Comments

2 Responses to “Link: How Large Traders Sneakily Disguise their Actions”

  1. Glyn Says:

    Hi Corey,

    I’ll follow the links you provided post this submission, I’m not sure however that I get the point you’re making above. Perhaps the links will help.

    What’s your position re the inter-connectedness of vol/price (if any) and how movements can be seen as genuine? I was wondering whether the extremly light vol over the last week during the markets rise has anything to do with the ‘real deal’ being news like this?

    http://www.ft.com/cms/s/0/d7a4be24-5b1c-11dc-8c32-0000779fd2ac.html

  2. Corey Rosenbloom Says:

    Glyn,

    The above topic is a difficult one, indeed, and it just takes frequent frustrations that are caused either by failed positions or stopped-out positions following otherwise valid signals. You begin to adjust your strategy and find out what’s happening. I’ve given up totally trying to interpret ‘scalping’ style techniques such as pure tape-reading or time/sales monitoring. It works for some but not for me.

    Volume is known to precede price. In other words, a surge in volume often leads to continuation in that direction in the short term. Volume is also used as “Confirmation/Non-Confirmation”. Classically, you want to see price movement in the direction of the established trend be accompanied with rising volume with retracements against the trend confirmed by decreases in volume (relatively). Any deviation from this pattern is a non-confirmation of price and should be analyzed.

    Volume can also be used to distinguish the actions of “Big Money” vs “Retail Money” with a sophisticated analysis.

    The low volume of the last week is simply a non-confirmation of the price rise in the market – it was deemed a ‘counter-rally’.

    The effect of the ‘credit crunch’ on the overall economy is yet to be determined. Many analysts are studying this and the answers are currently mixed. The true answer will be in price and volume.