I am pretty lucky these days. All day long I get a chance to talk to some sharp people on both sides of the market, both buy and sell. In my conversations the most common topic that gets batted around is, what is this market trading off of? Yesterday it really struck me while having a great chat with some of the guys at Encima Global - they are former Bear Stearns analysts headed by David Malpass. We talked about the different ways in which institutions are trying to trade this market. Encima is an economics shop and provides clients research and viewpoints, so the talk drifted to trading economic releases.
So what do firms do in trading economic releases? Many things. Some institutions are in the speed game, especially when trading off of major numbers like jobless claims or unemployment; the timescale from announcement to execution is down to milliseconds these days. By trading off the headline number they are looking to beat everyone else by pre-setting trade conditions for a given range of values. Others, in this market, have decided to trade off the context of the story as written by the journalist. Looking for the deeper story as the trading day develops. They trade with a longer horizon(days, months) using the backstory and viewpoints of both journalists and analysts to understand a longer pattern as part of a strategy. Both styles are valid for highly skilled players. Then again if a ouija board worked that would be valid too ;-) Trading off of earnings news or company releases works in a similar fashion.
All of the accumulated knowledge about a topic or number usually comes into play in what we think of as consensus. But given the situation we are in today -- the traditional view of consensus is all out of whack. Paraphrasing an analyst friend of mine's rant about consensus "How can you look at that when there is no new normal and established existing story lines change from minute to minute, people use to have time to digest" This goes to something I wrote about in last October for O'Reilly Radar - Games & Markets: Rules Matter
Right now the market is trading off of emotion, speculation, and government statements. Every one of those factors is multiplied by email, conversations, TV business news, government press releases, newspapers, blogs, and newswires. By monitoring these sources and keeping up with the market context, trading institutions are learning the new rhythm of the market. For example just yesterday the buzz in financials was a WSJ story on Citigroup, quoting former Fed officials as referring to Citi as the "Death Star"
Former federal officials have dubbed Citigroup the "Death Star," comparing the bank's threat to the financial system with the planet-destroying super weapon in the "Star Wars" movies. Privately, in the words of one official, they regard the banking giant as "unmanageable."
Combine that quote with a release of the banking stress test parameters and you have a couple of hours worth of thought that needs to be done in order to understand the catalysts for the financial sector. With the torrent of story flow, dialog, and commentary and not to mention regular news - if you're not watching, at a minimum, the tape, even in terms of Algo models, you're flying blind. So you're watching the tape, reading longer stories and digesting research while trading is happening realtime and on top of it you need idea generation, whew! - pretty crazy five years ago, totally atomic captain insane-o today.
So as I sit here this morning on February 26th with DJ futures in positive territory, even after an historic continued unemployment claims number that reached 5.1 million, I know that an Obama administration budget due today may cause some gyrations. The markets direction is all about the accompanying examinations, explanations, pronouncements, and of course the emerging context. As the dialog plays out, between the Government and the Market we're all ears. Before this crisis we traded, to a degree, off of fundamentals and understood common context - now it seems we only trade off of the latest movement in news or events. And the news is coming from everywhere.
