I read this at an Occupy Wall Street site:

“Let me tell you a wonderful old joke from communist times. A guy was sent from East Germany to work in Siberia. He knew his mail would be read by censors. So he told his friends: Let’s establish a code. If the letter you get from me is written in blue ink, it is true what I said. If it is written in red ink, it is false. After a month his friends get a first letter. Everything is in blue. It says, this letter: everything is wonderful here. Stores are full of good food. Movie theaters show good films from the West. Apartments are large and luxurious. The only thing you cannot buy is red ink.”

Great joke. No doubt scrutinizing your trading data to make sense of it is like something written in red, the code for which is blue.

Speaking of which, chances are, your earnings date is approaching. Your intraday volatility (spreads between high and low prices) is perhaps 4%. Across our client base, it’s now over 4% on average. To help you make sense of your stock price, the exchanges and designated market makers and surveillance firms are giving you columns of data on trading by different brokers and sector or economic news. They tell you so-and-so upgraded the sector, causing a strong rally.

You’re not sure. In your gut you think the euro has got a lot to do with it. Maybe the dollar. It would be nice to know. And it would help if you could assess how money will react to the news you announce next week or the week after. Continue reading →

Coming to NIRI National 2011 next week? Please visit us at Booth 304! We have no helicopter rides or trips to the Bahamas to give, but we do have a really cool microfiber for keeping those ubiquitous touchscreen pads and smartphones sharp.

June launched by kicking markets right in the rump. We blamed economic data. It’s true but not that simple. Behind the data at the behavioral level, institutions decided against equities roughly May 13. We don’t make this up, we just observe it in the way trades execute. When methodologies, purposes or time horizons change, it manifests in trade executions.

Money didn’t hedge with options expirations May 18-20 either. If you decide not to insure your house against loss, what might that mean? That you expect to sell it shortly, that risk is nonexistent, or that insurance is too darned expensive. As an analogy, two of those three are negatives and the middle one doesn’t exist on Wall Street.

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If you think “tail risk” is what happens if you grab a cat by the tail, well, that’s not far off. Did you know that an entire institutional subset is focused on the risk relative to theoretically ending up with a handful of grabbed cat? We’ll come to that in a minute, and how it might affect your stock.

First, these markets. Real, or more statistical arbitrage? Checking the data, something very unusual occurred last week. On November 4 in our data, the volumes we call electronic and speculative were dead, spot-on, even, at 35.8% of the total, each. That day, divergence in major market measures ceased, and volumes turned bullish. It stood out to us.

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