Happy New Year !

Wish all a Happy and Prosperous New Year !

Acc 8030, 23/12/2012

 

Took profit on the  CN A50 contract on the 17th December with a profit of USD 885.00, a kind of a surprise windfall. Lucky? No, in fact I have missed the bullish move in all the equity futures market with my conservative approach.

With no position, it's back to waiting game again.

 

Account 8030, 16/12/2012

The Nikkei 8500 Dec put option expired on the 14/12/2012.

The Shanghai A50 CN December contract  has a unrealised profit of USD 830.

I have adopted a very conservative approach for this account so far without taking much risk, in fact under utilising my margin. It must be a joke to most of my fellow traders. I am experimenting with this account with a longer term view to achieve my objective of 10% return per annum. I am still in a learning phase, maybe too slow for most to stomach, don't forget I am in semi retirement.  Probably I will take a more aggressive approach once I have build up enough confidence and foreign capital for this account.

So, anyone want to employ me as a consultant for a 10% return?

I don't believe in losing money, that's my major weakness, kiasu and kiasi now. I have taken too much risk in the past, now I am questioning myself how could I have taken those reckless risk.

Maybe I am just a good and skilful gambler With a Little Luck and dedicate this song (one of my favourite) to those who need it. http://www.youtube.com/watch?v=nFqKN8yhA54

Account 8030, 7/12/2012

Add on one SGX A50 contract for the account on the 4th December. This contract is a basket of 50 blue chip Chinese stocks listed on SGX for overseas traders, since non Chinese individual traders are not allowed to participate in the Chinese Futures market.

This is a damn bloody small futures contract (mini) worth only about USD 7,000 at the time of entry. I hated all these mini contracts because it's meant more for gamblers and not investors. A decent size futures contract should be worth at least USD 30,000 to USD 50,000. Exchanges are introducing more mini contracts so that they can generate more volume thus earning more comm. To hold USD 50,000 worth of stocks,  a trader would need to buy 7 contracts paying a much higher comm amounting to USD 5.60. For the retail trader the comm would probably be 5 times more.

A CME Euro currency contract is worth USD 125,000 and the comm that I am paying is only USD 2.30, obviously trading the CME contract cost very much less in comm. These old contracts were introduced more than 20 years ago and contracted quaterly, March, June, September and December. The investor can hold the contract for 3 months then roll over to the next future month if they want to continue holding on to their view. But contracts introduced now are all monthly, reason being Exchanges make more money from long term investors rolling over their positions.

Futures contracts were first introduced in 1864 for the main purpose of hedging. In order to grow this industry, thousands of contracts were since being introduced by the various Exchanges with contract size getting smaller and smaller.

The cost of trading is a very  important factor to the success of a trader, if the comm and spillage is too high, most likely the short term trader will not succeed.

100% Risk for 12% Return

I have been invited by a friend to attend a seminar on investment in German Heritage Building offering mouth watering 12% return in 12 months guaranteed by the developer.

One thing good about the advance in technology is that one can simply google search and get all the information about almost anything under the sun. Of course, some are hidden under the shade.

The developer, Dolphin Capital GmbH with its partners has more than 20 years experience, completing more then 12,000 units successfully, but employed only 40 employees and tie up with over 500 sales agencies. They have recently set up Dolphin Capital Asia to launch German property investments in Asia.

It's a short term investment tenure of 12 months with Principal and Profits Assured in a "Buy-Back" clause by the developer. It's just providing funding for their acquired listed buildings for redevelopment, the property is not owned by investors but by Dolphin. It's more like Ah Long San legally lending money to them.

Why don't they borrow from the bank at a much cheaper interest rate?

Why they don't issue bonds?

What's the risk?

Is this another Ponzi scheme?

The return is high, so is the risk.

Blindfolded

I have so many comments on my previous post thanks to Coconut and others who shared their thoughts and experiences, of course, I am still trying to figure out what make him tick with such confidence in his trading. Yes, look at the rear mirror, always be cautious of what's behind you and side mirror too, for the blind spot, be prepared just in case.

So, I would like to share further on this topic, looking at the rear mirror after an accident.

The father of my son's classmate is a private banker with a foreign bank. At one of the function, I had a chance to chat with this very successful banker. That was sometime in 2009 after the Lehman crisis where the whole world stock market crashed, very gloomy everywhere and possible collapse of the world financial system. Of course, I dare not tell him it's all because of some greedy bankers.

He told me the crisis whack many of his clients, many lost up to 90% of their capital, from $10 million worth to just $1 million, and all these clients are knowledgeable and smart, obviously or else they won't be so rich.

One of the reason why they lost so much money is because they are too smart, using a very simple investment strategy, by just following what our best fund managers in the two biggest sovereign wealth funds here are doing. How wrong can the best fund managers in the industry be? It's easy to make money, no brainer. They blindfolded themselves and drive along.

So they bought into the 2 biggest, best well managed Banks in the World, Citibank and Merrill Lynch with decades of enviable track record. Any objection at that time before Lehman crisis? These are among the best stocks you can have in your investment portfolio, safe and sound. They loaded up on these 2 stocks by following big brothers.

When there was a cash call in the mist of the Lehman crisis, they followed too by borrowing more from the bank to leverage, no choice or else they would be diluted. They forgotten all about risk and money management. These 2 banks are too big to fail, the US government will bail them out, but the question is when? The crisis deepened and the share prices tank with short sellers taking advantage and those who are long on margin, forced to cut their positions.

The rest is history.

Don't drive blindfolded.

At this point, I would like to introduce www.robertchuablog.com, written by a fellow floor trader, a very consistent trader who taught me about market correlationship when I went back to the arcade in 2008. He was magnanimous in willing to share that strategy at a time when I was lost in the wilderness. It was a very simple strategy but somehow or rather, it was a spark that brighten me up with confidence for the next few years. Though it doesn't work all the time now because the HFTs would be right in front of us with their speed, I am grateful to him for giving me that little lift.

He can express pretty well and do follow his journey in Forex trading.

Account 8030, 17/11/2012

This is the only trade done so far for the account. The option still have 3 weeks to go before expiry. The margin utilised is S$2,364.87 out of the capital of S$44,328.03, so I am actually using a small portion of the margin in a futures account. It's a very conservative approach to trading, that's why I can sleep soundly to attain a 10% return for this account.

This trade only cost me S$1.24 in comm, very cheap. The broker will be charging me interest for the negative Yen account, probably around 3% in a almost zero interest rate environment in Yen borrowing. That's where the Exchanges and brokers make extra money out from the traders, and they pay peanuts for my positive S$ account. And of course, they don't pay interest on any credit balances in the Yen account.

Some readers may feel the risk I am taking is too high for only a limited return but I felt otherwise. I will show my trades but not going to explain the reasons behind taking such trades. We shall see whether how I perform in a year's time. It's challenging for me firstly to show the account and secondly, for trades that are longer term which is not my forte. So, please don't follow what I am doing as my cut lost level is quite far away.

I will be looking out for more trades to add on whenever the opportunity arises, it might be a roller coaster ride that I have been used to all these years.

No-fee fund aims for 12% return

A friend who email this to me.

Working for free: The fund's founders - Mr Tok (left), Mr Wong (centre) and Mr Kong - and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. The trio say they won't collect salaries. - PHOTO: ARTHUR LEE

A FUND that aims to deliver 12 per cent a year and does not charge any management fees - that's what a new fund management firm is bringing to the market. It is an offering to the increasing number of accredited investors in Singapore who have yet to qualify as private banking customers, said founders of Aggregate Asset Management.

Many of these investors have holdings in unit trusts that have not been doing well, says Kevin Tok, one of the three founders.

Mr Tok, who has 20 years of experience in financial planning, says most of these clients are directed to unit trusts by their financial advisers after having gone through the six-step financial planning process.

"There aren't a lot of options out there for them. The boutique fund managers in Singapore don't actively market their service to this group of people," he says.

There's no way a typical client can retire well with a portfolio of unit trusts that charge very high fees, he says.

Unit-trust investors have to incur 3 to 5 per cent of sales charge and one to 2 per cent in annual management fees regardless of whether the funds make money or not. "If you leave your money there for five years, 10 per cent of the money disappears. And the value doesn't add up," points out Mr Tok, 43.

"The trick of (growing your savings for) retirement is to find something that's proven, that gives you an average of 8 to 10 per cent return a year instead of going round in circles looking for all sorts of strange products, like gold products, or trying to find something unproven to hit your 10 per cent," he says.

Value investing - buying of stocks with low multiples of earnings and cash flows, low price-to-net tangible assets, high dividend yields - is a proven process that generates good long-term returns, says Aggregate co-founder and its fund manager, Eric Kong, 44.

"We have no doubts that the value investing process can put our clients in good shape in the long term for retirement needs," he says. "We are putting our money where our mouths are."

Aggregate Value Fund, a small-cap Asia long only fund, will not have any sales charge and there will be no management fees. Mr Kong, and another founder and fund manager Wong Seak Eng, 33, say they will not be collecting any salaries. The firm will only charge the fund 20 per cent should it manage to increase its value above the initial $1 per unit subscription price. Performance review will be done every six months, and subsequent fees will only be charged if the fund exceeds its previous high, that is it has a high water mark in industry parlance.

The three founders and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. "We are not worried. We are not desperate because we know that this process is a good and sustainable process. Even if we have to (have) packet lunch everyday for the first two years, we will do it," says Mr Kong.

Office now is a $1,000 a month shared space in Bishan.

Says Mr Wong: "We are already mentally prepared that we are subsidising our investors in the sense that we will pay for the rental, air fares for company visits etc out of our own pockets. And under the new MAS (Monetary Authority of Singapore) regime for fund management firms, we have to maintain a capital of $250,000 at all time. We are mentally and financially prepared for that.

"We may have to wait two, three, or five years. It depends on the market cycle. But we will definitely work hard to deliver for the investors so that we will also be rewarded."

As noted by Mr Kong, the value investing process as adopted by various value funds has shown impressive records. Yeoman Capital, where Mr Kong and Mr Wong were from before striking out on their own, has returned a 12.7 per cent compounded annually net of all fees in Singapore dollar terms over about 15 years to September 2012.

Target Asset Management returned 17.6 per cent a year between 1996 and November 2010. Its fund manager liquidated the fund as it had gotten too big. A new value fund was started in June 2011, and it has returned 3.99 per cent since inception to end-October in difficult market conditions. It outperformed the MSCI Asia ex-Japan Index by more than 10 percentage points.

Aggregate, says Mr Kong, will generate stock ideas in a quantitative way. Then it will add a layer of analysis before selecting the stocks for its portfolio. An independent search process is very important in generating stock ideas. "You have to be very impartial in the search."

He developed his search process, scoring companies on the strength of their balance sheets, earnings record, and dividends record. "There are more than 10,000 stocks out there. (This quantitative screening) gives you a very fast way of getting to the undervaluation when the news are not out yet," he says.

Mr Kong's background is in computer programming, having worked in the Ministry of Defence in operations research "where we used algorithms and computer models to solve real-life problems".

But investment is his passion. And so he took the Chartered Financial Analysis exams some 10 years ago. He paved his entry to the fund management industry by first joining the banks, Citi and UOB. He then offered to work for free in a local fund management firm in order to gain fund management experience. But he was rejected because the firm wanted a CFA charterholder. Mr Kong wasn't one yet because he didn't have the necessary work experience.

He eventually joined Yeoman in 2002 and was made a partner a few years later. He left the firm in end-2009 to spend time with his home-schooled elder daughter.

According to Mr Kong, since he started tracking his personal portfolio, the return was 17.8 per cent a year between May 2005 and June 2012. Currently, 30 per cent of his portfolio is in Hong Kong, 20 per cent each in Singapore and Malaysia, and the rest in Thailand and Japan.

Aggregate will take a very diversified approach, with each stock making up not more than 2 per cent of its portfolio in a steady state.

"Warren Buffett advocates the focus approach," says Mr Kong. "But we find that when you bring your holding up to 5, 10, 20 per cent of your portfolio, you'll make more behavioural mistakes. You start to get emotionally attached to the stock, you fall in love with the stock. That is dangerous because it can really affect your judgment."

Also, Mr Buffett has a gift. He is able to read business very accurately. Not everyone has that kind of gift, notes Mr Kong. Aggregate prefers a more conservative and boring approach. "We concentrate on what's currently on hand."

Mr Wong chips in: "We don't make any unnecessary projections into the future."

Aggregate would rather look at the track record of companies, going as far back as 10, 20 years. Typically, Mr Kong says, the fund will hold its stocks for about five years.

Mr Kong reckons now is a good time to start a fund because valuations for equities are not high. He sees great value in Hong Kong. Some stocks there are yielding up to 10 per cent. He names Oriental Watch, Lai Fung and Herald as examples of undervalued stocks in Hong Kong; New Hoong Fatt in Malaysia and MK Real Estate in Thailand.

On the marketing of the fund, Mr Tok says the plan is to put Aggregate Value Fund on the iFast platform for products that cater to high net worth individuals.

The minimum subscription of the fund is $150,000. There is a one-off $2,000 subscription fee to cover the administrative, legal and compliance costs. There is a 5 per cent early-exit charge within the first three years. This however will be waived for investors who may want to withdraw less than 5 per cent from the fund every year as income.

DBS Bank is the fund's custodian, Ernst & Young its auditor, and Rajah & Tann its legal advisers. Crowe Horwath First Trust Fund Services is the fund administrator.

Besides Aggregate, APS Alpha fund also does not charge management fees. Another boutique fund manager, Lumiere Capital, also launched its Lumiere Value Fund in 2007 without management fees. But it started charging one per cent management fees at end-2010.

Nikkei 225 Option

Option trading is highly a risky, sophisticated and complicated instrument to most traders but it also provide a good source of passive income for the professional traders.

I do not encourage anyone to follow what I am doing for Acc FAT8030, it's my attempt to move away from scalping and experiment on other strategies based on my money management parameters and expected returns.

Nikkei is trading at the price of 8700 at the moment, decided to take a short 8500 Dec put at the price of 90 expiring in a month time. Will be collecting a premium of Yen 45,000 and will know what's the margin requirement for this trade tomorrow. Intend to hold this trade till expiry. Effectively I will lose money if the Nikkei plunge below 8410 after factoring the 90 points premium.

I have decided to trade the Nikkei Option because of the liquidity though I will need to pay interest on the Yen margin required for this trade. It's unfortunate that there is no liquidity in the Simsci option as my capital is in Sing Dollar and I wouldn't incur any interest charges.

Nikkei contract at the price of 8500 is worth Yen 4,250,000 (8500 x Yen 500), converted to S$ at the rate of 0.015399 is equivalent to S$65,446.00 worth of 225 Japanese Blue chip stocks.

Can I sleep over this position? Yes, definitely and soundly too though I have a slight leverage of holding a Nikkei 225 contract at 8500 over my capital base in this account. I will be collecting the premium of Yen 45,000 or S$693 upon expiry of the contract in December. In fact I would be most happy if the Nikkei will to come off since I have only utilise a small portion of my margin.

Waiting Game

This is the account that I will start my quest for a 10% return over one year. It has remain dormant for the past few months after I quit from the trading arcade. My fast TT trading platform plus stable Internet lease line is still very very slow compared to the co-location of the Algo machines beside the Exchanges. No more calender spread trading, arbitrating and scalping, the machines have replaced these manual specialist traders.

This account bring back fond memories of my glorious days as a floor trader, it's not uncommon for floor traders to make 100% return a month as the brokers offered us up to 4 times the Exchange margin for short term trading like scalping or spreading. The machines have taken over these roles, they are so fast that sometimes I had my trade filled without even realizing it. It's time for me to move on. I have lost my edge in short term trading.

I have not put on any trade so far, training my patience, no hurry, I have got a year to do so which in the past, it would have taken me just a day for a 10% return. Now I am back to earth, learning again how to trade longer term. It won't be easy even for such a miserable return, what a joke! Where is the confidence? Where is the passion? It has faded away.

The account is mostly in Sing dollar, thus trading other currency contracts would incur interest on margin holding them. The most appropriate contract would then be the Simsci which is in Sing dollar. At the price of 3470 currently trading, one Simsci nominal contract value would be S$69,400 giving me some leverage over the roughly S$45,000 capital base.

It's unfortunate that the Simsci options contract failed to take off, or else it would be good to write the call option to get some passive income hedging against a long position.

The Power of Consciousness

One of my student send me this link, http://www.youtube.com/watch?v=VYYXq1Ox4sk&feature=related

Probably it will help you change the way you think.

Napoleon Hill inspired me with his book "Think and Grow Rich" when I was still struggling as a lowly paid bank employee. Think positive, you will be able to overcome all obstacles in your life with the right mental attitude.

Challenging myself

After some consideration, I have decided not to post the daily trading results of trader FAT8023 on a regular basis, as his performance is by far mediocre and nothing much we can learn from him. Probably will mention some of his trades once in a while.

 

 

 

Looking at the daily S&P cash chart, there is high possibility that the market will head further south for the time being, any retracement offer good opportunity to go short.

What is consider good return for our money?  The world financial system is flush with cheap money from irresponsible governments that keep printing money. With such low interest rate of less than 1% from a Fixed Deposit account and high Inflation rate, our money is gradually being devalued. The prices of everything from houses, cars, food, drinks, etc have increased tremendously over the past few years.

Going into semi retirement from active trading, I am looking into how best I can perform for a decent return from taking longer term position trading. Recent corporate bonds yield less than 4%, some even less than 3% and still being over subscribed. There is just too much money floating around looking for some safe return.

After some thought, I shall re-activate a dormant account and challenge myself for 10% return for a year. No stress, anything above 10% would be a bonus. It's going to be a patient game looking for the right contract and waiting for the right level for an entry. I will also use options to enhance the return.

From a friend who email this to me.

7 Signs That You're Trading in the Danger Zone

There are warning signs that a trader is going down the wrong road in a trade or in their trading in general. Traders have to go with the flow of the market, manage risk, and keep their mind open to actual price action. Departing from these principles are dangerous and could result in huge draw downs in capital and even blowing up their accounts. Trading through the filters of fear, greed, or ego are very dangerous.

1) You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.

2) You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.

3) When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.

4) Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.

5) Fighting against the prevailing market trend over an over again can chop your account to pieces.

6) When losing, you start trading bigger and bigger to get back to even. When you are losing you should start trading smaller and smaller to decrease losses.

7) When you actually disagree with the market and believe it is wrong and you are right. Price is reality wherever it is, your job is to trade trend and price action not your own opinion.

Interview with a High-Frequency Trading Expert

Below is an article sent to me by a good friend which I would like to share.

 

High-frequency trading (HFT) – wherein computers transact thousands of

times per second with incomprehensible speed – now accounts for over 60%
of all trades on American exchanges. How does this sweeping market change
affect retail investors?

There are two very different answers to that question. Supporters claim that

high-frequency traders (HFTs) are a net-positive market force because they
provide liquidity and tighten bid-ask spreads. They say that high-frequency
trading is rarely if ever used for nefarious purposes, and regulators make sure
of it.

On the other side, detractors claim that HFTs regularly manipulate unaware

investors and otherwise destabilize markets. They say that HFTs are a net-negative
force on the market and should be reined in.

The answer surely lies somewhere in between. But which is closer to the

truth? To find out, we talked to Garrett, an expert on market systems and
high-frequency trading. Having experienced first-hand the problems HFTs can
cause, he fits firmly in the “detractor” camp, for reasons you’ll read below.

Garrett gave us excellent insight into how HFTs profit, along with tips on how

to make sure they don’t profit at your expense.

I found this interview highly educational, and I hope you do too. It contains the

kind of inside intelligence that separates the informed from the uninformed

and allows us as individual investors to understand and adapt to our changing

markets.

The Casey Report

Hello Garrett, and thanks for taking the time to chat with us. First, can you tell us your back-story and explain how you got into highfrequency trading and real-time trading research?

GARRETT

Sure. I worked for an asset management firm as a portfolio manager’s assistant. We used traditional fundamental analysis to calculate company prices. Beginning with the July 2011 crash, our strategy no longer seemed to be working. We lost a lot of our clients’ money – nearly 40%. It was brutal.

During that same time, I started to notice odd price movements on my charts,

ones that I had never seen before. Prices would randomly spike in amounts

and directions that made no sense. When I dug deeper, I realized the

movements were too fast and too uniform to be human. Computers caused

them.

My bosses didn’t understand this, and didn’t want to. I couldn’t raise my

concerns because of the old-school culture of the firm. But that refusal to

acknowledge the new reality – that computers were increasingly driving the

market – was leaving my firm at an enormous competitive disadvantage.

Essentially, the market was changing, and we weren’t adapting.

I began to study high-frequency trading on my own. I started by following a

few professionals who were sounding the alarm, trying to alert investors that
the game has changed. My favorite sources were (and are) Themis Trading
and Nanex.

Eventually, I narrowed my focus to study the market micro-structure – which is

basically what happens to orders after you click the “buy” or “sell” button on
your brokerage platform. That’s where all the action is, and it’s where you can
see exactly what the HFTs are doing.

I came to the conclusion that, because of HFTs, our markets are broken and

fragmented. I left my old firm in mid-December, took my own money and

started running my own shop, based on this premise. My strategy uses

software to exploit the dislocations caused by HFT.

TCR: What made you think that high-frequency trading was behind those

strange price movements you were seeing?

GARRETT: For one, the movement didn’t look like anything I’d seen in the

past. It didn’t match human action. It was too fast, too consistent.
Anomalies would randomly pop up on my screen. A particular stock would
drop 10% in one second, then run right back up a second later. I asked
colleagues what these movements were and where they were coming from,
but no one had an answer. Even the shortest-term charts, in which every data
point represents one second and the data is extremely granular (or so I
thought) didn’t yield any answers.

Eventually, through my own research, I realized that there was something

more going on inside these one-second data points - something you can’t see
on a standard chart. That’s where the HFTs operate – in milliseconds.

TCR: So you’ve made a career of exploiting the dislocations caused by HFTs.

What’s your answer to the question on everyone’s mind: does high-frequency

trading affect the average retail investor?

GARRETT: Absolutely, although the impact varies based on what type of

investor you are. For a shortterm trader, someone who makes many trades
per month, the effects are huge.

I think the best way to understand HFT’s impact on you is to understand its

advantages over you. There are three major ones.

One, HFTs have better access to the market. They have what we call direct

access, which means they don’t have to go through a broker to execute their
trades. When you place an order with, say, Scottrade, Scottrade will choose
which exchange the order goes to, and they’re going to execute the order
where it’s best for them. They’re going to buy it at the best price they can and
then sell it to you.

HFTs, on the other hand, can choose the exchange that they want to trade on.

They can look at all the prices for a given stock on all of the exchanges and
make their own decision, rather than having a broker make it for them.

Two, HFTs obviously have a major speed advantage over other investors.

They glean this advantage in many ways: by putting their servers right next to
the exchanges’ servers, by using very sophisticated equipment, and also
simply by virtue of programming a computer to act on pre-set instructions,
which it can do much, much faster than a human ever could.

Third, the best HFTs have an impeccable understanding of the market microstructure: what happens after you submit an order to your broker? Where

does your order go, how is it executed, how are orders prioritized? HFTs are
experts on this, but very few retail investors even understand the basics.

TCR: It sounds like the average investor is seriously outgunned. But what

about a retail investor with a longer timeframe who only makes 1-2 trades a
month? Does he need to worry about high-frequency trading?

GARRETT: HFT affects all investors to an extent, because stocks are now
priced differently than in the past. The market used to consist mostly of
investors analyzing cash flows and balance sheets, trying to calculate a
company’s fair value. HFTs, on the other hand, react to movements in stock
prices alone. That is not necessarily a bad thing, but since HFTs are
responsible for two-thirds of the trading volume, we have the strange situation
where they can set the price based on what they perceive others’ perceptions
to be.

Also, even long-term investors have to enter and exit their trades at some

point, which is where the most risk is. You might enter the trade when the
computers are doing their trending movements and inadvertently buy at a
peak.

TCR: What are trending movements?

GARRETT: Trending movements are when an HFT deliberately moves a

stock price up or down for its own benefit. For example, a computer can
submit an overwhelming number of sell orders, knock the price of a stock
down a few percentage points, then buy the stock back cheaply.

TCR: That sounds like overt manipulation.

GARRETT: It is, which is why investors need to understand how to protect

themselves. One of the most important tips I can give you is to never enter
stop-losses into the market. There are algos designed to sniff out stop-losses
and manipulate them against you.

I’ve seen this many times: prices drop 2-4%, clear out stop-losses, then run

up for substantial profits. So the poor retail investor gets his stop-loss tripped
and sells on the cheap to an HFT, whereas the HFT buys cheap and profits
once the price ramps back up.

TCR: Do HFTs target smaller or illiquid stocks because their prices are easier

to move?

GARRETT: Sometimes, but I wouldn’t make that generalization.

Counterintuitively, many HFTs target the most liquid stocks.

TCR: So what are some other ways that HFT shops make money?

GARRETT: There are many different strategies. Some take advantage of

rebates, which are financial incentives the exchanges offer for being a marketmaker.

Here’s where I should clarify that not all HFTs are bad. I’m very sour on HFTs

in general because I’ve seen the havoc they can wreak, but there are good

ones. Market-makers increase liquidity and make the markets more efficient.
That’s great. There are good HFTs.

Some HFTs try to read and process the news quicker than everyone else.

There are algorithms designed to read newspaper headlines, search for key
words and execute trades based on what they read, all in seconds or less. I
wouldn’t say this is particularly nefarious, because the HFTs in this case are
just doing what humans do – trading the news – but faster.

That said, it can create problems. Awhile back, there was an errant news

release about Boeing going bankrupt, and the HFTs started selling because
they saw the keywords “bankruptcy” and “Boeing.” The story turned out to be
an error.

In that situation, most human traders would pause and think, “Wait a minute,

I’ve never heard a thing about Boeing going bankrupt. What’s going on here?”
But the computers don’t think. They just execute their instructions, and in this
case, it caused a crash.

Then there are the manipulative algorithms, the ones that prey on other

investors.

TCR: Can you give us an example?

GARRETT: Sure. Many HFTs will make near-simultaneous trades on different

exchanges and profit because of the delay in one of the exchanges. An
example will help me explain: let’s use the NASDAQ and EDGE exchanges,
and say that ABC stock is trading at $1.00.

The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to

sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can
simultaneously cancel the $1.01 sell order on the EDGE exchange and
replace it with a buy order at the original price of $1.00. EDGE immediately
accepts that $1.00 order, because its system has not caught up to the new
price of $1.01, and the HFT’s net position becomes zero.

This is possible because of latency, which is jargon for delay in the system.

The net result is, the HFT captures a $0.01 arbitrage.

By scalping this tiny amount from many trades, the profits add up quickly.

A second example: HFTs can model other traders’ behavior. When someone

trades through Scottrade or Interactive Brokers, their order has a unique
number attached to it – the same number every time a client places an order.
This number is bundled with all relevant trade information (time, price, etc.)
and sold as an encrypted “enhanced data feed.” An HFT can then use those
past results to predict the trader’s behavior.

TCR: So HFTs try to predict what you’re going to do before you do it. Do the

brokers admit to selling this information? Can traders opt out?

GARRETT: This data is standard and available to anyone who wants to buy it,

so it’s not that HFTs are purchasing illegal information. But the data set is
huge and is only of practical use to players with very fast and powerful
computers – meaning HFTs. And yes, most brokers I have encountered will
allow you to opt out of having your unique number attached to your information.

To be clear, I’m not saying HFTs track your individual account and literally

jump in front of you right before you trade. But they do use this information on
the aggregate to model traders’ behavior. So an HFT could have a very good
idea of when traders on, say, E*TRADE’s book will enter into a certain
transaction.

TCR: Many defenders of HFT claim that it is a net-positive force in the market

because it provides much-needed liquidity and tightens the spread between
bid and ask. Are those claims true?

GARRETT: As I said earlier, there are many different HFTs that do many

different things. But in my experience, in the aggregate, both of those claims
are false. High-frequency trading will reduce liquidity when we need it most,
and will flood the system with nonsense at other times.

Case in point, computers regularly withdraw liquidity just before news

releases. Oil is a great example. The other day, there was a status report
scheduled at 10:30, and around 10:28-10:29, the buy orders on USO (United
States Oil Fund, an ETF that aims to track oil) dried up. That doesn’t happen
with human traders.

So anyone who wants to get out of USO before the news release is out of

luck; they can either take a bad price or wait until liquidity comes back.

Contrast that with the end of most trading days, when HFTs are unwinding

their positions; I actually turn my platforms off for the last 10 minutes of the
day because the action is confusing and useless. Sure, there’s plenty of
liquidity as the HFTs unwind, but the action is just nonsensical. There’s no
new information being introduced, no price discovery. It’s just scalping.

The whole liquidity argument is just a justification. On net, HFTs hurt liquidity

more than they help.

I also don’t buy the argument that HFTs keep the bid-and-ask spread tight.

I’ve seen algorithms that quote as far away from the NBBO as they are legally
allowed to.

TCR: Can you expand on that?

GARRETT: SEC rules say traders can quote up to 8% from what the National

Best Bid and Offer is, and they’re allowed to “drift” another 1.5%. So legally,
traders can trade 9.5% above or below the NBBO.

Well, there are algos that probe the market, starting by submitting an order

close to the NBBO, then working out to the fringes. These orders only last for
milliseconds – they are not intended to be hit, only to sniff out other traders’
orders. So the algo works its way out, trying to get a bite on a price further
away from the NBBO, and thus more favorable to them.

That is not a recipe for a tight spread. Now, the spread might look tight on

your screen, but when you actually go to fill an order, you won’t get it,
because the order has already been withdrawn.

Think of it like a dying star. When a star dies, we still see its light here on

Earth, because the light is still traveling to earth. When an HFT cancels an
order, your comparatively slow computer still sees the order for awhile. Then
you try to fill it and it’s “Sorry, that order no longer exists.”

TCR: So are the quotes on Google Finance or Yahoo Finance reliable?

GARRETT: They are reliable enough to use as a broad snapshot. But I would

not trade on them.

TCR: What markets are least affected by HFT?

GARRETT: I don’t know the answer to that. I see HFT the most in equities,

but that’s just because I trade equities. It’s also prevalent in futures and Forex.

Within equities, HFTs tend to focus heavily on ETFs. The manipulation is far

less in most individual stocks.

TCR: Good to know. What long-term effects do you see as a result of HFT?

GARRETT: I think the biggest issue is the erosion of trust. The markets are

becoming so difficult to understand, and there are so many predators, that I
think people will start to withdraw and place their money elsewhere.

When investors start to realize (a) they don’t know enough about the market,

and (b) the learning curve is so steep as to be almost unnavigable for
someone with a full-time job, they’ll start to take their money elsewhere.
Instead of the stock market, why not go to lendingclub.com? Then they can at
least invest money with someone in their community and actually know what’s
happening with their capital. Not to mention, it will probably get them a better
return.

This is a little off topic, but dark pools are another example of shady market

practices. Dark pools are arrangements between large institutions to trade
blocks of shares among themselves. The problem is, these trades can only be
seen by the participants – you and I can’t see them. They occur outside the
market.

Themis Trading did a white paper called the Phantom Indexes, and they found

that only 30% of all traded assets are traded on visible exchanges. Think
about that: it means that indexes – like the Dow and S&P 500 – are being
calculated with only 30% of actual volume. The majority of trades – 70% –
occurs in the dark and is not factored into the indices.

It’s a little bizarre if you ask me. I don’t understand why that’s allowed. But it’s

another example of market trust being whittled away. It won’t be easy to earn
it back.

TCR: So you think the average investor will begin to shun the stock market?

GARRETT: Yes, but I also think it’s possible that companies like PIMCO and

BlackRock create their own exchanges and compete to make things fairer for
their clients. That would be a viable alternative to our national exchanges,
which are losing credibility fast.

The federal exchanges have sold their character. Take co-location, for

example, which is when HFTs put their servers as close as possible to the
exchange to gain a speed advantage.

I understand that NASDAQ wants to make money by selling these spots. But

not everyone can be located directly next to the exchange. So Goldman buys
a co-located spot for millions of dollars, which is great for them, but not so
much for everyone else. Once again, the little guy gets bilked.

TCR: Do you think there will be regulatory responses? Might the government

ban HFT?

GARRETT: I don’t see how. The quicker players will always have an

advantage. There will always be traders located closer to the exchanges than
others. But there are some steps that would help.

One proposal that I like is to mark the orders that are designed to last for 250

milliseconds or less – the ones that are designed never to be filled. That way,
when I see an order on my screen, I’ll know if it’s a legitimate order or just a
computer trying to accomplish who knows what.

The thing is, the SEC already has rules against placing orders not intended to

be filled. Obviously, it doesn’t enforce them very well.

I think anything that would slow down the market a bit would help. That would

bring more humans back as a percentage of traders, which is a good thing.

TCR: What about a transaction tax?

GARRETT: That sounds like a sad excuse to raise revenue. It’s not going to

deter the big guys with the deep pockets. Once again, it would end up hurting
the little guys, who already pay much higher transaction costs.

As I’m sure you and your readers are well aware, raising the cost of doing

something doesn’t usually have the intended effect. The government has tried
to make it more expensive for people to get DWIs, guns and drugs. None of it
has worked.

If anything, a transaction tax will hurt the marginal players. The big, deep pocketed institutions would be fine with a tax. They might even welcome it.

Remember, it’s all about speed, and you’re not going to fill that gap by taxing

people. You’re only going to fill it by controlling the way information is
streamed. It needs to be slowed down.

TCR: Before we wrap up, can we recap and summarize how HFT affects the
individual investor and what he/she can do about it? From our conversation, I
count three broad types of manipulation.

The first occurs during the transaction, when you’re buying or selling a stock.

For example, an algo could use your stop-loss against you.

GARRETT: Yes. Keep stop-losses in your head, not entered into the market.

Also, we didn’t talk about this, and it should be obvious, but I’ll say it anyway:
don’t place market orders unless you want to get shammed. If you place an
order and see the price is $15.60 on your screen, your order can be rerouted,
filled on a different exchange for, say, $15.65, and you just donated 5 cents a
share to an HFT.

TCR: We’ve always advised our readers to use limit orders, even before HFT.

Now it’s doubly important. The second major impact is that HFT actually
misprices stocks, meaning market prices are different than they would
otherwise be in the absence of computers.

GARRETT: Exactly. Fundamental investors used to dominate the market.

They would buy and sell based on companies’ results.

Today, HFTs outnumber humans in trade volume and thus are a stronger

force on prices. HFTs buy and sell based on what they perceive others’
perceptions to be, as quirky as that sounds. So instead of analyzing revenue
and expenses, computers analyze how other market participants act, and
trade accordingly.

TCR: It seems that normal investors can counteract this by investing for the

long term. HFTs create a lot of noise, trying to guess what other traders will
do. But ultimately, if a company is profiting, its stock will do well.

GARRETT: Precisely. You don’t want to get into a trading battle with them.

But if you have a long-time horizon, fundamental investing can still work.

TCR: Third, computers manipulate stock prices up and down, using the

movement to their advantage. This seems to be the most nefarious and
overtly manipulative. Is there any way to counteract it?

GARRETT: You can mitigate this risk by being patient with your orders. If you

enter a limit order and it isn’t hit in the first hour, don’t impatiently move it.
Stand your ground. That way, you can dictate the price you take, even in the

midst of all the HFT noise.

Also, HFTs love to manipulate ETFs, much more so than individual stocks. So

that’s something to keep in mind.

TCR: Great. Anything else?

GARRETT: I do want to add one more thing: talking to you about this actually

hurts my trading system in the long run, but truthfully, my strategy of exploiting
dislocations shouldn’t exist. For all I know, I’m taking money from my parents’
retirement fund because their financial advisor doesn’t understand what he’s
doing. I want my kid to be able to invest legitimately when he’s older. Pillaging
unsophisticated investors is bad for everyone in the long run, so I want this
information out in the open.

TCR: Well, this has been a very educational discussion, so mission

accomplished. Thank you very much for speaking with us today.

GARRETT: My pleasure.

An expert on market micro-structure, Garrett leverages his vast knowledge of
stock exchanges to build trading 

The Dirty Tactic Of HFTs

Below is a link on how HFTs took advantage of their speed to slows down the quote feed to others.

http://www.cnbc.com/id/49333454

To regulate HFT, S.E.C. turns to one of them.

http://www.cnbc.com/id/49321429

Is that Cheating?

http://www.cnbc.com/id/49103708/?Ex_Insider_Calls_High_Frequency_Trading_Cheating



HFTs can get away with murder at the moment, Exchanges welcome them as they provide huge growth to the trading volume, giving them fantastic volume rebates as well as the edge in the speed of execution.

Of course there are still traders like Coconut who are still able to stand up to the HFTs, my respect to them.

As for my beloved Simsci and Tw contracts, HFTs have murdered many of my fellow traders there, some too slow to run away and the rest stubbornly stayed on to fight the monsters.


 

Fat8023 Week 7

Following 2 more bad trades, trader start questioning his own strategy.  Confidence is shaken, no doubt. Despite having performed well in the past one year trading his own mini account, trader just have a certain mental block trading a friends account, extra careful and fear set in.

Of course, he understood my concern over averaging on bad trades, thus he was unable to execute his strategy. From those trades he had taken, there was a tendency to pick top and bottom based on short term indicators for day trading. His stop was too far away and he didn't ride the profit far enough on those good trades. I told him that's a recipe for disaster.

 

FAT 8023, week 5 and 6

Trader took small profit for most of his trades and also cut losses smaller, probably due to the smaller volatility. I wonder why he didn't trade the Euros.

The Euros moved 1000 ticks up from the low and have retraced 300 ticks, that's good volatility, retracement to sell.

FAT8023 4th Week

Trader Shorted the AUD which came down about 20 ticks, put a stop near to entry and got hit later in the night with 2 ticks profit to cover comm. But, he was not so fortunate with the GBP and suffer losses in both trades.

Trader uses multiple time frames, 5 mins, 30 mins, 4 hourly and daily charts and MACD as one of the indicators for entry. He was caught himself too when the short term indicators failed him, he tried to stop the bull from charging forward.

He blamed himself for not being patient enough and not following the rules and refusing to take smaller losses even when the indicators start to reverse. A little lost of confidence after the account goes under, very normal emotion for a trader. Told me he will go slow and be more patient.

Met up with a few former Nikkei floor traders last night at the wedding dinner of the daughter of a mutual friend, all of them have reduce their trading volume tremendously just like me, that's how tough it is to make money trading short term now with the Algos in control. The rabbits were all caught by the Algos while the human traders become the sitting ducks when there is any news announcement, we just can't react fast enough.

The older traders like us were extremely lucky that we have our golden years, our skill is no longer suitable for today's technology

Euro

Are we hitting a resistance for the Euro at this level in the Daily chart? The upmove has been very powerful, picking the top at your own risk.

 

 

The MACD in the 4 hourly chart has failed many times to cut down, can only sell when it cut down again, just have to wait patiently for the Bulls to exhaust themselves.
 

FAT 8023 4th week, Friday

Trader put a stop at entry level for the CAD, the order was filled with a slippage of 6 ticks when the Fed announced the QE3. He called to ask why the order was filled so far away. I told him he was lucky the ordered was filled only 6 ticks away as most of the professional orders would have been pulled out just seconds before any news announcement. I told him that he should put the stop at least for 5 ticks profit to cover slippage and comm. A lesson learnt.

From his trade, I can feel he is conservative, no hurry to get into any position and doing small trades, one at a time for the moment. I am comfortable, no pressure on his side to perform and time for him to get use to futures trading.

So, I was wrong on the market, I managed to take small profits on the S&P and the GBP before the market rally and cut loss in Simsci, damn it, from a long postion to turning short.

But I was caught on the Euros and the Yen, didn't respect the market, deserved to be punished. But lucky it was just a very small position. I am now paying to learn, and should heed my trader's advice, "DIE DIE must put stop, no matter how far away", so I must act on what I teach and preach.

FAT8023 4th Week Thursday

The above chart is provided by dailyfx.com and it's free!

Trader 8023 went short last night in the CAD. The futures contract of CAD and the Cash is reversed, meaning buying the CAD forex is equivalent to selling the futures contract. The above chart is showing the Cash forex USD/CAD on a 4 hourly time frame.

Reasons for the entry is because the MACD for the 4 hourly cash chart is cutting up as well as the price moving above the averages.

The risk involved in this trade is the impending FOMC decision on QE3 tonight, anything can happen. Let's see how it play out and trader is trying to ride the profit despite having 30 ticks in the pocket.

Where to from here?

With the bad figure on the Non Farm Payroll on Friday night, the USD tanked against all currencies while the S&P surge in anticipation of QE3 and talk about stimulus by the Chinese government.

I am caught short with some small positions in Euros and S&P futures while I long the Simsci futures. I shorted the Yen futures too at around 1280 level.

Can anyone tell me where the market is heading?

In fact no one would be able to tell where the market is going, I just have to managed my own positions based on risk and money management.

My gut feeling is telling me, when would it be a better time to sell the Euros, Yen, GBP and the S&P?

Of course, it's election year in the US, short the S&P at your own risk.

I am putting in some sell stops for these contracts if it head down south again, wish me good luck.

 

FAT8023 Week 3 Saturday

AUD tested  the low a couple of times after trader went long, he took profit after a spike up, usual mindset of most traders, decent profit after the market went against him.

The USD weaken further against all currencies on Friday night after the figures came out and trader was caught short at almost a 100 ticks higher than the level he took profit the previous day. I would too  have the same mindset to short since the AUD came up that much, but of course the force was too great for anyone who tried to stop the advance. The train just roll them over. 

Trader stop loss was 60 ticks away, no doubt it was a bit far away. I had previously discussed the strategy with him over such far stop loss levels which I felt profit to stop loss ratio was out of line. He told me yes, he still need to polish up especially on taking profit, the need to really go for the home run. Saying is obviously easy, the difficult part is in the execution.

FAT8023 Week 3 Thursday

Trader threw in the towel, cut losses on the 2 CAD contracts after it came down and retraces back and gave back those profits he made over the last 2 weeks. He then switch to shorting the GBP instead. He told me that the indicators were moving against him and he wanted to protect the account instead of letting it go under.

Trader work on Tuesday, so no trading. Took profit on the GBP and went long on the AUD.

He track the market while still working and did some trades on his own Forex account with his Samsung S3 mobile phone, that's the beauty of technology. But, unfortunately the Pats futures platform don't support mobile trading. He told me some of the trades he took but dare not put it in the futures account, still very conservative at the moment.

Yesterday the CAD came all the way down, if he had hold on to them, he would have made some tidy profit. But....

FAT8023 week 2

Trader 8023 was busy this week with some part time project, thus was able to enter only 2 trades for the week.

Last night he average on the bad CAD position with another contract which is quite close to his initial stop lost at 53. Averaging on bad trade is not what I can stomach, but for him it's just in his strategy. It will be interesting to see how he manage this position next week.

 

Trader 8023

A new trader joined me recently and I would like to share his performance here for those aspiring traders.

This trader, a former booth clerk on the floor has been trading currencies, mini Forex for many years and has busted his account many times in the past. Since it's a mini account, he busted a few thousand dollars each time, then top up again and again once he accumulated enough money from doing some part time job. I admire his perseverance and passion for trading, never giving up despite failure after failure.

He only managed to start making money recently after he chatted with a kind soul in one of the Forex online forum, became friends, took pity on him and offerred to teach him the right way to trade.

I know this trader for many years and lost contact with him after the trading floor closed, we met up few months back on FB and we started sharing trading ideas and strategies. I'm interested in his strategies since he told me he has been profitable for the past one year after so many years of struggling.

After following his calls for 2 months, I found that he was indeed profitable and doing fine on the mini Forex account. I then offerred him to trade on one of my futures account with a 30% profit sharing. Meanwhile, he will continue trading his own mini Forex account for his living expenses and the futures account would be a bonus if he is able to make money, a win win situation for both of us.

He started off cautiously and told me he would be conservative in taking trades for this account. I am comfortable with his assurance but will still monitor him closely and guide him along.

He made a few mistakes for the first week as he was not so familiar with the trading platform, entering trades wrongly and some contracts like the CAD and YEN are the reverse between futures and Cash Forex market. It will take a bit of time for him to get use to it.

Profit for the 1st week is S$437.49 after comm. A good start!

Karen - The Super Trader

It's amazing how she did it.


http://www.youtube.com/watch?v=cXy9HoWX0eshttp://www.youtube.com/watch?v=cXy9HoWX0es

Lies

I'm fine, still alive and not having any nose cancer that spread to my throat.  Dear Singapore Forex Trader, you are really a disgrace to our country, have your facts first before spreading any rumours and lies posting comments on other people's blog. You are such a coward! So evil.  For goodness sake, spend sometime to do good deeds instead of constantly thinking how to harm others by stabbing them from behind. 

Happy Lunar Dragon Year

Wish All a Happy and Propserous Dragon Year!

I believe this will be a good year to be back into the stock market. All the Feng Shui Masters were so wrong last year predicting a rosy outlook, instead the Singapore market came off about 17%. Trust your own judgement and money manage your own portfolio, always stay with blue chip stocks with good dividend track record, they have not fail me so far.

A friend told me that my personal problem is like having a big bad position,  I need time, effort and patience to slowly unwind and salvage the losses. Yes, I'm tired, very tired indeed, even finding the time to put my thoughts here, I simply can't concentrate.

Wish All A Happy New Year!

It took me 6 days later to wish my friends here a Happy New Year, 2012. Sorry about it, rather disturb. I am facing some personal problems recently, unable to concentrate on anything I'm doing. Trying very hard to calm down, look for solutions and tread carefully to salvage the situation. Can't believe I'm facing a mid life crisis.

Coconut has been lonely here expressing his thoughts and honestly revealed his huge losses last year. That's the risk involved in trading, the ecstasy and happiness in winning versus the pain and sorrow in losing. I've been through the various stages of such emotions, experience that made us wise, sometimes full of regrets, wish I can turn back the clock.

Trading has been extremely tough last year with lower volatility and liquidity. In the past, I used to encourage anyone who is keen in trading not to hesitate, now, I would ask them to seriously consider it carefully before taking the plunge. It's simply not easy. Remember, it's a negative, negative sum game.

It take lots of courage to admit our mistakes, I really salute Coconut for doing that, cut all the losses and move on, not many can do it. How's the feeling? It must be real painful. Scalping for me is just too tiring now, trying to compete with the Algos for that small piece of cake in the local contracts without any edge. No longer young and alert, have to change strategies and go for longer term trading to reduce comm.

A trader I came to know recently revealed that he made a 3000% return on capital since November 2010. He has been trading as a retail client for the past 5 years and was about to give up trading with the remaining $20k. Miracles just happen, his big break came during the Japanese earthquake followed by the tsunami, the rest is history. So it's still possible to make the big money, futures is all about leverage. He spent 5 years learning. he has guts that's extra-ordinary, a very humble guy.