Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question
by ilene - July 13th, 2010 12:46 am
Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question
Courtesy of Tyler Durden
Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming ‘cut to commercial’ to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise models of short term trading volume fluctuations likely are increasingly inapplicable."
In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.
The paper is, needless to say, a must read for everyone who has an even passing interest in stock trading and market regulation (alas, yes, that would mean the SEC, and Congress). And while one of the key qualities of the paper is presenting the history and implications of High Frequency Trading, and its rise to market dominance primarily as a result of the revision…
High-Reliability Reversal Signals
by Chart School - May 9th, 2010 5:52 pm
High-Reliability Reversal Signals
Courtesy of Pharmboy
Chp. 9 of Pharmboy’s TA eBook (scroll down for links to Chp. 1 through 8)
Figure 63 shows four of the most highly-reliable reversal signals that every long should know charts: evening star, shooting star, bearish engulfing and bearish gap up.
Figure 63. Signals for reversals.
Evening Stars are one of the most reliable reversal patterns available as the failure rate is low. Evening stars suggest the rally is slowing because the open-close range decreases. The doji at the top signals an end to the rally and a struggle ensues between bulls and bears. This doji day is a critical candlestick. There is a very high chance that the stock price will drop the next day. Should that occur, the evening star pattern is confirmed, as a long white candle, the doji in the middle (or a large tail above a green, followed by a down red candle.)
Figure 64 shows two evening star examples…