Wednesday, December 12, 2012

Santa Claus Rally

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Written by Car Weiss From my perch as the Lead Architect at …sceeto, I analyze a lot of Order Flow, and I also speak with a lot of Traders and a lot of Quants.
During a conference that we we hosted yesterday (December 06, 2012), a moderator of the conference, William Lolli, introduced the thought that any upcoming Santa Claus Rally would likely be propagated, managed, and driven by High Frequency Trading (HFT) Bots.
What William says makes sense.   As over than 70% of all trading done on electronic exchanges (NYSE, NASDAQ, CMT, CBOT, NYMEX, EUREX, ICE, LSE, etc.) is done by automated trading bots, the logic follows that the only way that there can be a Santa Claus Rally is if these HFT bots actually drive the rally.
Without the active participation of the HFT trading bots, any attempt at a 'Santa Claus Rally' will fail.
Lolli offered the insight that immediately after President Obama’s November 28th meeting with the CEO’s of some of the biggest brand names in Corporate America (see meeting attendees below) the underlying ‘tone and structure’ of the HFT Trading Bots shifted.
His impression of the Bot activity since the conclusion of that meeting through yesterday (December 06, 2012) was that any sell-off on the S&P 500 futures contract was normally was littered with HFT selling activity, was actually dulled by a lack of color by any germane HFT selling activity.
He drew this conclusion from ongoing observations that the standard HFT pattern in most market sell-offs is that there is HFT selling all the way into ‘The Hole’.
The Hole’ is the bottom of any market sell-off.  This ‘Hole’ frequently sees an increase in HFT selling activity.  This 'last moment' selling is what some trader’s would define as ‘selling exhaustion’.
What Lolli, and others, have noticed, is that since the conclusion of the Presidential\CEO meeting on November 28th, HFT selling activity in 'The Hole’ seemed to have dissipated.
Hence, what once was, no longer is.
As someone who studies market structure and also studies how changes in price are invoked by changes in Order Flow, this insight that Lolli presented, fascinated me.
That was is today.
With his commentary itching my brain I surfaced up the following charts which show HFT Buying & Selling activity.
The Red Triangles on the chart, as visualized by …sceeto’s order flow monitoring algorithms,  represent increased activity in HFT selling.
The Green Triangles on the chart, as visualized by …sceeto’s order flow monitoring algorithms,  represent increased activity in HFT buying.
This chart is a snapshot of trading activity in the S&P 500 e-Mini electronic futures contract for the two day’s prior to the 'Big Chief's' meeting (Author's Note - I was not invited to this meeting in D.C., but if asked, I would have gladly taken Amtrak down and would have been polite and not broached the myriads of elephants in the room - so please ask me down for the next shindig).
In the chart below, you will note that there are Red Triangles all the way into ‘The Hole’ for each substantive down move. This is what normal exhaustive HFT selling into ‘The Hole’ looks like:
This next chart is the S&P 500 the day of the meeting (November 28th, 2012).
Notice how there was selling into ‘The Hole’ right into the time of the meeting:
In this final chart you will notice the down moves from November 30th though the morning of December 6th, the down moves are punctuated by either a lack of selling or a plethora of buying:
What changed?
The Conspiracy Theory Chatter
Could a conspiracy theorist make the case that certain CEOs who control a bunch of algorithmic trading bots, told their trading desks to pull back a tad the throttle?
Historically, there are plenty of times when there was a vacillation between significant selling in the hole, and then lack of selling in the hole....what was interesting here, was the magnificent timing of this vacillation with the Presidential meeting.
We will continue to monitor these HFT events and update this blog with any bot activity that our trader's think is interesting and\or abnormal regarding any potential, or ongoing, Santa Claus Rally.
Meeting attendees: Frank Blake, Chairman and CEO, Home Depot Inc (HD.N), Lloyd Blankfein, Chairman and CEO, Goldman Sachs (GS.N), Joe Echevarria, CEO, Deloitte LLP, Kenneth Frazier, CEO, Merck & Co (MRK.N), Muhtar Kent, CEO, Coca-Cola Co (KO.N), Terry Lundgren, CEO, Macy's Inc (M.N), Marissa Mayer, CEO, Yahoo Inc (YHOO.O), Doug Oberhelman, CEO, Caterpillar Inc (CAT.N), Ian Read, CEO, Pfizer Inc (PFE.N), Brian Roberts, CEO, Comcast Corp (CMCSA.O), Ed Rust, CEO, State Farm, Arne Sorenson