The Lawrence Chan Blog

A buddy of mine told me the other day that many book authors also write their book reviews directly at Amazon for the benefit of exposures. He thinks it is a good idea and suggested that I should give it a try. The short conversation turned into a lengthy discussion of posting reviews online in general that I think worth writing about.

The Amazon community is big and obviously many readers would read the reviews there to assist them in making their purchase decisions. As someone who reads all the time, I am sure if I post all my reviews there I will have presence in many trading books. The problem, however, is the ongoing discussion there that I have to deal with.

I don’t mind engaging in discussions about the books I have read and the reviews that I have written about them. The problem is that I would not have enough time to go through all the past reviews I posted to handle the discussions scattered everywhere. For a few reviews, I can probably handle that. For a dozen or more, it will become a very time consuming task.

The other concern is that my ebooks are not just available through Amazon. There are other online ebook retailers featuring my ebooks. Posting my reviews only at Amazon will make my readers who bought my work elsewhere not able to see my reviews.

The lazy way out is to centralize all the reviews here so that anyone interested in my research work will also get to read the reviews. It also makes it easier for me to engage in discussions on my reviews as I do not need to check on hundred different places.

Not the best solution but nonetheless a solution.

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Right before US stock market was about to close on Jan 26, 2013, a huge block of Apple shares was dumped. We are not talking about 10K, 50K or even 100K block. We are talking about 800K shares of Apple got dumped at close.

So what happened?

Why the rest of the stock market keep going up while Apple got hammered yet never dropped much throughout the day?

I guess it is time to explain one important aspect of the stock market dynamics – institution unloading. I just posted a new article, The War Of The Bot, explaining this messed up situation.

Personally I have seen my share of nasty market making both on and off floor.

For example, a market making brokerage that handles a large sell order on a large cap from an institution demanding a price higher than previous day close by $0.50. Then you would see the issue magically pop $0.50 and likely more, inducing a short squeeze of sort and then the cross is done. For anyone looking at the incident that was the very reason why the institution chooses to use the brokerage firm to execute the order because they know the brokerage firm can make it happen. Yet, the market maker was just doing his job.

Manipulation?

I am not in a position to judge.

Not a fair game?

I just know that it happens everyday.

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Many retail traders learned about the evil market making bots through mainstream media. Yet, they are not the ones that rule the game. Their nemesis, institution bots, are the ones even market making firms are afraid of.

Institution Level Trading Is Different From Retail Trading Completely

Institutions participating in the stock markets cannot just go out and buy (or sell) a particular stock at market. Especially when the intention is to accumulate or unload a stock with market moving size, they have to do that in stealth mode. If these institutions simply put a market order out there, they will move the particular issue wildly. The end result is very bad average price for the order. It may even halt the issue due to the extreme volatility induced. No one wants to be put under the microscope of the authorities when it is totally unnecessary.

Many boutique firms are specialized in handling this type of large size orders for the institutions. Their traders (and their bots) are highly specialized in breaking the large orders into small chucks so that no one can tell if such pending supply (or demand) is there. All kinds of strategies are employed to hide the true intention. For example, if an institution needs to unload a large block of shares, the traders handling the order do not just unload the issue all day long. They would at times buy the shares back to nudge the market higher so that they can unload at a better price.

Secrecy Has Always Been A Top Priority

Think about those who some how gain the knowledge of a particular institution’s intention and the particulars of its trading instructions. Due to the sheer size of the pending order, it will imbalance the short term dynamics of the particular stock, and sometimes it would affect the related indices too if its weighting is significant (like Apple). These players who learned the intention can lean on the imbalance to gain absolute advantage for (almost) sure win.

The leak of the intention and the actions taken by the other players as noted above will hurt the institution as they are the one that will be at the receiving end of worse fills on their order. Hence, institutions like to guard their orders and intentions as secretive as possible.

Within the past 10 years, the introduction of specialized client side bots built for these institutions partially solved the problem. For average large size orders, they can be handled without human intervention, thus reduces the chance having the intention leaked to unnecessary parties.

Here Comes The Catch

The use of specialized bots by the institutions induced a technology war with the market making firms. When the institutions having orders entering the markets, the market making bots are the ones that has to absorb the liquidity imbalance. No one wants to lose money simply because some institution decided one day to throw large size orders around. Thus, a race between these 2 classes of bots had started.

Market making bots are now smarter and faster then ever in identifying potential intention of orders coming from a particular brokerage. The goal is to at least not being burn by the institution. Of course, early detection of the intention would not only save the market making firms a lot of money, they can also design their bots to take advantage of the situation to profit from it.

For example, if an institution successfully disguised its intention and unloaded so many shares to the market, the market making bots would have been lured to keep buying as they failed to recognize the unusual situation. When these market making bots are loaded up with too many shares, they have no choice but to dump whatever they have bought. In another words, the institution successfully transferred the risk to the market makers.

In the same situation, if the market making bots figured out the intention of the institution early and not taking the bait to accumulate the shares, the institution would have no choice but to dump at worse price level, unless, they can wait for another day to execute the plan.

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Several members emailed me asking why spending several weeks on upgrading the site to use new wordpress backend. It has been working fine, so why waste time on something cosmetic. Since this could be a question that many of you also wanted to ask me, I am going to post the reasons behind.

First thing first it is security issue. There are escalating attempts to hack, hijack, and break-in to the site. It is happening everyday. With the old version of wordpress, which has quite a number of security issues, will be compromised soon if I choose not to do anything.

Some of you may remember that last year there were several incidents that the site was slowed down and crashed during trading hours. The last few times that happened were due to hostile hacking attempts.

Second, in order to offer download file area, real-time signals, alerts and other goodies, a more efficient wordpress backend is needed. The old version I was using will have difficulty in handling heavy real-time upload and download while hosting our real-time chat at the same time.

Majority of these work is now done, so I will be back on my normal schedule soon with more time to write about trading techniques and market bias.

Later!

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Here is a short explanation of what I do with Real-time Commentaries.

What It Is

I mostly trade during US market hours as my primary markets are the index futures and the index derivatives of all sort. My secondary markets are forex majors and I mainly trade them with mechanical models so they do not require a lot of attention from me.

In general I monitor the markets actively during 9 am to 4 pm North America Eastern Time. Sometimes I start early if there are economic reports that I know will affect the index markets. Sometimes I also pull all nighters when the markets go wild and that I know the situations are exploitable.

I would post to the daily thread on what I see. Specific patterns or market breadth reading that I deem important at the time. In another words, it is my mental notes on the current market conditions. It shows you how I analyze the markets and produce projections in real-time.

I was told long time ago I was a pretty bad instructor. So, instead of instructing others on how to trade, I choose to show everyone how it is done. By studying how I analyze the markets in real-time, it is possible to gain insights what experienced traders really do in making trading decisions. This is very useful for beginners and struggling traders to learn to trade properly.

At times I post my trades too if they can be called out on time with well defined risk. I do not do that very often because it breaks my concentration when I discuss my positions. I know it because it has happened before and it will happen again.

My highest priority is my trading profits because that is how I make my living. That is also the main reason why I choose not to charge for money. I cannot put an amount on the service that I can feel justified to compromise my trading. Hence, during hectic market situation when a lot of concentration is required, comments will be brief.

Members of the site can ask me trading related questions in the threads or post them in the discussion area. During market hours, I will answer the questions when I have time. So if you want to start a long discussion on something, it will be much easier to do that in the discussion area as that will make it easier for everyone to join in.

What It Is Not

This is not a market call service. And I am not interested in doing a live market call service at all.

Automated signals or alerts are possibilities, if I find the technology or means to make that available.

This is also not a stock tips service. Although there are several big names I mention very often, they are mainly used as my confirmation tools for identifying potential turning points.

This is not the support email and I don’t usually handle the support issues myself. Email my guy at questions@daytradingbias.com if you have technical issues related to the site.

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