Algorithms,HFTs and Flash crashes

Algorithm is a step by step process which involves a formula or a set of rules to solve a problem.In day to day life one or the other household equipments we have, operate on an algorithm.Take for example- A Washing Machine, which has got a set of rules for washing,rinsing and drying.The machine operates on this algorithm and in the event of any anomaly, the machine informs us through a beep sound.It cannot auto correct the mistakes or the anomaly and hence it doesn't fall under machines with artificial intelligence.It needs human intervention to work normally.Same is the case with many algorithmic trading programs which are being used by the FIIs and investment bankers or some technocrat traders.Algorithm doesn't have any intelligence on its own.It does what exactly it is programmed to do.Yes, you heard it right.It is similar to my office boy.You ask him to buy a soft drink and if the store doesn't have it, he will come back saying that it is not there.He will not call you to ask, whether he can buy the other available brand at the store.And you have to send him again.On the other hand the HFT- High frequency trading uses lot of algorithms to execute different orders in a trading day.It executes even thousand orders a day and mostly the trade position is held for few minutes to few hours.By the end of the day there are no trading positions left.Every trader has a few tricks up his sleeves in trading.But the limitation is the process of executing it lightening fast before the market could react.There is were HFT kick in as they have less than a micro second execution time.The organizations which use HFT reduce the volatility of a particular script by creating a market for the particular script.In other words, they act like market makers thus reducing the volatility and bid-ask spreads. And what happened to Nifty on Friday is like a flash crash.It happened within seconds.Infosys dropped around 18-19% during the time and recovered before the markets were closed.Some of my friends attributed this to the error in order punching in both the INFY and the Nifty futures.This lead to the fall as a huge order got executed (a sell order) without the price being mentioned and it got traded to all the available buy orders.This happened within seconds and the markets recovered rapidly.In my opinion it should be because of a punching error and suddenly the algorithms and HFT systems started executing their orders as the prices started dropping and this resulted in the flash crash.In May 2010, DOW Jones fell about 1000 points within seconds and recovered most of the fall before the end of the day.This was attributed to the error in order punching and resulted in a flash crash as the HFT and algorithm picked the signal of the sudden fall and started executing the orders.This all happens within micro-seconds leaving no space for human intervention.No matter what system you use for trading, be it technical analysis or Macro-economics or you trade on the calls given to you by a friend who claims to be an analyst,kindly have a strict stop loss in place.Don't have the stop loss order in your mind.Have it punched in into the trading system.The advantage of doing so is, you can avoid emotions while the prices are nearing your stop losses and less human intervention is possible on days where we see a flash crash.(To receive the Daily Market Report and Breaking news during market hours, in your inbox, type your email id in the box(Subscribe to Broker King) below the World Map in the blog and click Subscribe).www.brokerking.blogspot.comFor your comments and suggestions Kindly visit our FB page, http://www.facebook.com/pages/Broker-King/115212095212768

SGX Nifty

SGX Nifty trades  at 5292.5  at 0710 hours IST

Near term market view.

There is no cheer for the Greek bailout stuff.Most analysts expected a cheer.Now hear this,"A rally would end when a good news for the rally doesn't warrant a move in the rally's direction." Stay cautious with ur longs with a trailing SL.(A strict trailing SL) :) 

Trade what you see.

From the lows of around 4500 in the month of December we had hit 5400 yesterday.Roughly a 20% gain.It was a clear indication that the markets will move up when the RBI announced a CRR cut.We were trading around 5050 in Nifty futures when the CRR cut was announced.The 200 DMA was around 5195 on the spot and we comfortably crossed that hurdle and now currently trading around 5400 levels.Around 5200 levels traders were talking about the over-bought situation in the front line stocks and the index.Indices were in no mood for a pause.Today, Nikkei hits 3 month highs as the Auto giant Toyota raised the profit outlook and the strengthening of Yen boosted the sentiment.It is few notches away from hitting the 9000 mark.

  Today we may trade above 5400 and there is a good chance that we may close above that level if there are no negative surprises from the EU.

  Reliance Industries is trading near the maximum Buy back price(870). Avoid buying near those levels.And yesterday, Government rejected the price revision proposal submitted by Reliance on the KG-D6 gas.It added that $4.2 per mmBtu price was agreed upon by the company and furthermore the Supreme court said the company should proceed with the price which was being agreed upon.

 The GDP data released yesterday by the CSO(Central Statistics Office) showed that the economy to grow by 6.9% in the year 2011-12 which was lower than the projected 7-7.5% by the policy makers.

  FII remain buyers in the Indian Bourses and markets are in no mood to correct in the near term.Trade with a strict stop loss.A rally would end when a good news for the rally doesn't warrant a move in the rally's direction.Even a bad news is not affecting this rally.Markets are looking out for reasons to cheer day in and day out.Trade what you see and use trailing stop losses for your longs and strict stop losses for your shorts.

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200 DMA- Here we come.

Finally Nifty Spot managed to close well above the 200 DMA.With better auto sales for the month of January and HSBC January PMI at 57.5 and the European rally helped our indices to scale new highs for the year.Reliance Ind. closed up by 2% as the buy back program kick started yesterday.Today is an important day as the Supreme court today decides whether the 2G licenses allotted during the tenure of the previous telecom minister should be cancelled on account of the irregularities in awarding the same.The Supreme court to pronounce its verdict on the case filed by Dr.Swamy to probe the present Home Minister's role in the 2G licenses issue during his tenure as the Finance Minister when the licenses were issued.

  Last time when the issue propped up the indices tanked for the day.Keep an eye on the same.SGX Nifty futures indicate that Nifty should be opening above the 5300 mark for the day.Avoid fresh positions till the verdict is out.Once the verdict is out,you can initiate long/short positions depending on the outcome.

  SEBI announced new norms yesterday on the IPP ( Institutional Placement Program) to help promoters to offload their stake.It is a welcome move as the Government is struggling to raise funds for the share sale program in the PSU stocks.

 All the Asian indices are trading in the positive territory for the day.French bond auction to take the center stage after the European open.France plans to sell around 6.5-8 Billion Euros worth of longer tenure bonds for the day.If they manage to sell at lower yields, the markets may move up further.

 Stay cautious ahead of the Supreme Court verdict.

Apologies for not writing in the past few days as I was tied up with a family function.Hope everyone booked profits in the OnMobile short-Medium term call given around 74.8. It made a high around 81 last Friday(8% move from the Buy levels).

 

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Nifty-short term

Europe is trading positive for the day.Dow Futures are trading positive.Nifty facing resistance around 5200, which happens to be the 200 DMA.Every bounce to 200 DMA can be shorted with the 200 DMA as a SL on a closing basis.

Bidding adieu to Jan series.

        The January series comes to an end today after a remarkable journey.Sensex had hit 17000 mark yesterday and Nifty managed to close above 5100 for the day.RBI announced a CRR cut by 50 basis points or half a percent in its policy meet.RBI also lowered the GDP forecast to 7% from the earlier 7.6%. Nifty and Bank nifty surged to make new highs for the day and heavy weights like SBI and L&T closed up by 5% for the day. The much awaited Reliance Ind. buy-back will be open from Feb 1st and will last till Jan 19th 2013.The maximum price for buy-back is set at Rs.870. In the year 2011, Reliance underperformed the index and was down by 35%. Friday after market hours the company announced its results for the third quarter and posted a drop in earnings.The buy-back is widely seen as a cover up for the bad results.

       Rupee today strengthened and closed at 50.07/08 to the US Dollar and in intra-day made a high of 49.925 against the Dollar.

        In the International front, data released yesterday in UK showed that the total public sector debt rose to a record high and crossed 1 trillion pound mark which is around 65% of UK's GDP. The debt plan of Greece reached nowhere yesterday and it triggered a sell-off in European markets.Greece has got more debt than it can actually pay.Adding fuel to the fire , S&P said it may likely declare ratings of Greece to, "Selective default".

        The European indices edged lower for the day and the US indices ended flat to negative.

      IMF said yesterday that the European debt crisis could send the world economy into recession and added that the epicenter of the damage is Europe but the rest of the world is increasingly affected.

       I expect our markets to be volatile ahead of expiry with a negative bias.Weak earnings from Europe can trigger a sell-off in the European markets in the near term.Nifty rallied 13% from the low it made on December 20th. I would advise caution at higher levels and would advise investors to book profits in banking and realty stocks.PSU banks' earnings to set the tone for Banking index in the near future,Buying index puts in Feb series is advisable. 

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