Trading

All posts tagged Trading

There is a debate in the UK about how David Cameron will be remembered. Further from the mainstream, the New Statesman attempts to define the legacy of New Labour’s “Golden Generation”, whose political careers appear to be over. A common theme of the conclusions is that no matter how intelligent you may be; an inability to connect with the electorate will be your undoing.

The aura of technology is painted by Apple, Google and Facebook; companies that tell consumers what their hearts desire before they know it themselves. The reality of much of the tech world is more mundane, and an inability to provide customers with what they want will kill off innovation.

At OTAS, our quest is to simplify efficient equity trading to the point where all that you need to know is encapsulated in a single chart. To arrive at that point however, is a journey of a thousand marginal improvements, more in keeping with the mantra of an Olympic coach than a Silicon Valley visionary. At each point we test our innovations with the heavy users of our software, collect their feedback and adapt the service to be of incremental use.

The barrier to our one-chart-world is the plurality of use cases for the software; differences that are largely unknown outside of equity trading desks, but which create a number of competing demands. One trader may focus only on the liquidity of orders, while another wants to see unusual price patterns. Some desks desire an automated dealing solution that sends regulation trades for low touch execution, while others require frequent updating on delivery versus benchmark. The quest for one-chartism continues.

To this end we are launching the Intraday Screener. This may be connected to an order book, portfolio, sector or market index and will show you at a glance the outliers in real-time trading.

OTAS Intraday Screener

OTAS Intraday Screener

The example above is of the UK non-life insurance sector. The size of the bubble represents the value of shares traded, while its position shows the deviation from normal in terms of both volume and return. In this snapshot, seven of the eight shares are trading up, a couple of which to an unusual degree (to the right of the chart). Four of the shares are trading with exceptional volume, the most extreme of which is down on the day. By hovering over this bubble we reveal real-time performance data for this outlier, Jardine Lloyd Thompson.

In truth, Intraday Screener is not a single chart. You may change the axes to show whichever combination of performance metrics you desire, be that absolute or relative to normal, relative to a basket of similar shares, liquidity, spread or predicted volume. You may also change the variables defined in the size and colour of the bubble, as well as alter the chart to show a map format. Yet we believe the screener represents meaningful progress towards the one chart to rule them all.

The chart above makes an important point about efficient trading, which is that it is not the biggest order or most liquid name that should automatically command your attention. Trading in such names is most likely to be within the normal range, so that steady execution using a risk-adjusted schedule is the optimum way to complete an order. Often the exceptional action is in other order book names, where close attention is required to avoid losing precious performance. The Intraday Screener shows you immediately the names that require your trading skill.

There are users who trade too few names a day to be concerned about relative dispersion. There are others who trade too many for a single chart to capture effectively. There is even a third category that has to be finished before the portfolio manager makes another tour of the floor. Yet we hope that Intraday Screener proves to be a most useful tool for our customers and one that effectively combines machine learning with their human intelligence.

White Rabbit: Don’t just do something, stand there                                                – Walt Disney, “Alice in Wonderland” 1951

Kudos to Ben Hunt for this excellent piece on the role of narrative in markets, and for using better quotes than me. Anyone who can base insightful equity analysis around a quote from the Godfather deserves special mention.

Ben takes us all the way from his overarching explanation of what is behind market moves, right down to the nitty gritty, which in this instance means Salesforce.com. The image below shows the inexorable rise of analysts’ forecasts for the company’s earnings, even though Ben notes that he is “pretty sure that Salesforce.com has never had a single penny of GAAP earnings in its existence”. The chart also shows the large wobble that the shares had earlier in the year, although the doubters have since seen the error of their ways.

Salesforce.com Share Price and Estimates

In a simple but telling piece of analysis, Ben shows that in the last five years, owning Salesforce.com on only the 21 days after its earnings releases and the 43 days that the Fed made an announcement, returned 167%. Owning Salesforce.com on the other 1,208 trading days would have lost 8%. For a stock up 138% in that time, you could have been standing around doing nothing an awful lot and avoided losing money.

Ben also notes that CEO Marc Benioff, whose ebullient narrative drives the stock’s upward trajectory when the Fed Chairman is not doing this for him, uses 10b5-1 programs to sell shares in his company every day. These programs are predetermined sales and thus do not flag on the OTAS Insiders stamp, but you can see them by unticking the Priority Transactions box in your Core Summary app.

Daily Selling by Salesforce.com Insiders

In many ways Salesforce.com is typical of the handful of software companies that truly make it. Over time the company’s success returns cash flow and eventually earnings and the rating slowly normalises. While Salesforce.com is still 3.8x the average sector multiple, the steady de-rating appears to be well underway.

Salesforce.com Eroding Valuation

Reflecting on Ben’s analysis that you make money in short bursts and could spend most of your time doing nothing, I was struck by the similarity of this to the OTAS trading mantra, which may be expressed as SLOW DOWN AND DO NOTHING. Most of the time when trading you may leave your orders in an algo and do something else. Only in exceptional circumstances do you need to intervene to adjust an order and OTAS will fire an alert to tell you when that happens.