When trading we watch a stock’s corresponding futures or index.  For MON the stock I was trading on the Open, SPY is my corresponding index.  Generally when SPY trades higher MON should and when SPY trades lower then MON should follow.  I say generally and this was not the case at one very important moment today.

Again MON was very strong.  It was above yesterday’s resistance of 74.  74 also was a longer term resistance level.  MON was In Play due to its conference yesterday and sharp move from 70-74 into yesterday’s close.

MON was in an intraday uptrend.  It found some resistance finally at 76, and then traded down to 75.55.  At this 75.55 level there was an important battle.  The sellers won and MON headed for lower ground.  Those well versed in intraday technical analysis (ME!) expected a move to at least 75, the next intraday support level.  In the words of the Rolling Stones,”You can’t always get what you want.”

MON had cracked the important 75.55 level.  And then seemingly fortunately for the shorts, the futures and indexes started tanking.  Should I have a salad for lunch of maybe some soup?    SPY tanked.  I am gonna go with the salad.  SPY broke the AM support of 110.10.  I am gonna get the Big Salad.  SPY violated the longer term support of 110 (past resistance becomes support).  SPY quickly found 109.80.

And so what happened to our MON?  It tanked through 75 right?  Not exactly.  A buy program was turned on, which I will now name Buy the Tanking Futures Program.  75.41 stuck the bid.  What?  MON then was pushed through 76.   Just another fun program brought to you by HFTs.

Anyway that is their game.  This is the same principle as the Buy the New Low Program or Sell the New High Program.  The program takes the other side of a trade that has traditionally worked and then forces the short term traders out of their trades laughing all the way to the bank.

Best of luck with your trading! Don’t forget to follow us on Twitter!

Times are hard for active traders these days. The ridiculous growth of HFT algos with their noise is starting to weed out the unable to adjust, overly frustrated and under capitalized traders in the industry. Last week I heard on the squawk box that Goldman’s HFT operation lost money only one day last quarter. That is just ridiculous. Talk about having an edge.

JP sent me this picture last Friday after we got ran over by the HFT algos in our stocks. (sorry to the animal lovers out there, just a pic we found on the net. That is exactly what happened to the shark tank last Friday)

We had three amazing setups that worked great right from the start. As the play started to develop we were looking for places to add big daddy size to the position on confirmation. The problem was that every time we loaded the boat and thought we had it we got madly shaken out. We couldn’t put ourselves in a position of strength to counter the nonsense in the middle caused by the HFT algorithms. And there’s nothing they love more than a trader in a position of weakness to move the stock to the places that surpass our threshold of pain by just a couple of cents.

I have spent the last couple of days rethinking about how I trade. Thinking about my plays so that I know how to put myself in a position of strength. The adjustments I need to make to my trading to redefine my edge. The plays I need to avoid now to make sure I don’t end up like the sharks in the picture above.

While at dinner last week with a few of the shark tank traders and an honorary guest, we talked about an important concept.  Namely, spending your energy on the things you can control and spending less and less time worrying about the things that we can’t control.   Here is my list of things I can control:

1. Getting enough rest at night.
2. Being in the office by 7:30am to prepare for the day and watch key levels on the stocks trading in premarket.
3. Staying until 5-6 pm looking at my tape, writing in my journal, looking at the top gainers/losers/volume, finding trading ideas for the next day and talking trading with other traders.
4. Being mentally prepared to trade every single day.
5. Sharing information with the desk.
6. Thinking obsessively about your edge and how you need to redefine it when the market changes.
7. Controlling my emotions. (easier said than done but know I can do better)
8. Staying disciplined and patient.
9. Come in with at least 1-2 really good trading ideas every day.
10. Stay after hours watching stocks after hours to identify key levels for the next trading day.

I have witnessed a lot of people come and go in my short 4 years of trading. I can count on my hands those who I think honestly do all the things above.   Most people just come in by 8:30-9am, look at briefing and expect to find something by the open. They are often the ones pacing out shortly after 4pm.   Surely there are a select few that have been able to be successful without worrying consciously of the things they can control.   But they are often the most affected when the market shifts suddenly and their edge diminishes.

I am a victim of worrying and spending too much energy on those things I can’t control at times.   It infuriates me to look at my work and find that I am making perfectly sound trades and I am losing constantly to the dopey HFT programs.  But the good news is that I know that focusing on the things that I can control makes me money.  While I look at my work putting all feelings aside I know the things that work, the plays that used to work that no longer work, and the ones that never worked before fundamentally but now work beautifully because of the “mind fudge” game out there.

So if you are starting to feel the effects of the HFT algorithms it is time to step it up.  I am not the least concerned about my trading.  I know what I need to do and have thought about the changes I need to start making starting tomorrow. Do you?

I am writing an article for SFO magazine on HFT (High Frequency Trading) and its effects on the markets.  For me the most glaring change are the plays that no longer work.  Specifically paying for a new high in a stock and playing for upside momentum.  Too often the result of paying for the new high is a seller sticking the offer, and then coming sharply low offer, causing the short term longs to hit the bids lower.  Ripper.  We can this the Sell the New High Program.  A mirror image of this program is placed into the market for a stock that hits a significant low.

My question to our readers is: What effects do you see HFT having on the markets?  What changes have you made to your trading as a result?

This article will be published in SFO magazine and then I will discuss this article and HFT in greater detail on my Sunday night show on StockTwits TV.

In light of all the recent commotion about high frequency trading (HFT), we have decided to compile a list of articles that depict the advantages, disadvantages, as well as arguments for and against, HFT. The list follows below:

Stock Traders Find Speed Pays, in Milliseconds: This is the original expose`piece by Charles Duhigg in the New York Times

What’s Behind High Frequency Trading (Added 8/3/2009): Outlines the main definitions, questions, and relevant information related to HFT and how it affects different types of investors in the market.

Goldman’s $4 Billion High Frequency Trading Wildcard: Tyler Durden describes the benefits HFT provides to its developers and users.

HFT: The High Frequency Trading Scam: Karl Denninger discusses why HFT disadvantages non-algorithm using traders.

Weekend Opinionator: Is Wall Street Picking Our Pockets?: Tobin Harshaw discusses the possible inequalities caused by HFT.

High Frequency Trading Roundtable: Joe Saluzzi shares several of the main points and his reflections of a meeting with HFT traders.

Thoughts on High Frequency Trading and Stock Market Manipulation: Dr. Brett Steenbarger poses his thoughts on HFT and its effects.

Whoa, A Glitch in The HFT: Michael Durbin discusses the possibility of a glitch in HFT algorithms and the likely consequences.

HFT and AMZN: Bella discusses how to deal with HFT algorithms as an intraday trader.

Demystifying High Frequency Trading: Damien Hoffman of Wall Street Cheat Sheet interviews pro quant trader Fari Hamzei about HFT and how to work with it, not against it.

Schumer Urgers Ban on So-Called ‘Flash Orders’ That Give Priveleged Traders Sneak Peek at Stock Sales Before Other Investors: Schumer’s appeal to the SEC to ban flash trading.

High-Frequency Trading Faces Challenge From Schumer: Discusses Schumer’s letter to the SEC that calls for a ban on flash trading and the threat of such legislation.

BATS invites Nasdaq, DirectEdge and CBSX to Withdraw Flash Orders: Tyler Durden posts a letter by the chairman and CEO of BATS, Joe Ratterman, that calls for other ECNs to ban flash trading.

Schumer Announces That Nasdaq Endorses Ban on ‘Flash Trades’ – Exchange Would Welcome SEC Action AGainst Practice That Gives Advance Info to Certain Traders: This press release reports on a phone conversation between Senator Chuck Schumer and Nasdaq CEO Robert Greifeld about the possibility of a flash trading ban.

Goldman Electronic Trading Head: More Regulation Needed: Greg Tusar, managing director of Goldman Sachs Electronic Trading, supports increased regulation in HFT.

Rewarding Bad Actors (Added 8/3/2009): Paul Krugman disucsses the social implications of HFT and how it affects non-alorithm-using traders.

Curb High-Frequency Trading?: Larry Leibowitz, head of US markets for the NYSE, differentiates between HFT and flash trading and reaffirms that the NYSE does not partake in flash trading during an interview on CNBC.

S3 Analysis Shows High-Frequency Trading Has No Impact on Retail Equity Prices: An analysis company, S3, describes their conclusions that HFT has no impact on retail investors.

High-Frequency Traders Say Speed Works for Everyone: Speaks about the benefits of HFT for all traders.

HFT (high frequency trading) has dominated the financial media of late.  @zerohedge, Charlie Gasparino and CNBC, the StockTwits nation, @steenbab, GMan from @smbcapital, and many other talented bloggers have all weighed in.  And then came Senator Schumer:

(from Bloomberg courtesy of @zerohedge):  Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban “flash orders,” saying the transactions give high-speed traders an unfair advantage over other investors.

Wow!

For all those heavily invested in adjustments to HFT you cannot ask for a more powerful person to enter the room.  You have gotten Senator Schumer’s attention.  Well done.

I will let others discuss the merits of HFT in length.  I am not an expert in market ethics or the strategies employed by sophisticated hedge funds and mutual funds employing HFT.  And I do not decide policy for the securities markets.  I will tell you though that I cannot get fills that I used to get.  Programs touch a few shares of my order and immediately cut me.  I can add there is more trading being done on exchanges that I cannot access.  This is unfair.  I have spotted HFT programs that are impossible to beat.  So I stay clear of them.  And as I trader I certainly hope the markets offer a level playing field for all of us.

Look, the players are in the room.  And this is excellent work done by those who have spoken out.  Senator Schumer and government agencies handle policy.  I am a trader.  I will focus my attention on the adjustments that I must make during this trading period that includes HFT.  And I hope in this blog to offer a few helpful ideas for traders while this HFT controversy is sorted out.

Yesterday we had such an example of HFT that I have learned to avoid.  At 86.60 @smbcapital tweeted:

if you want a good example of HFT manipulation watch $AMZN around 86.60

HFT was dominating trading around this level.  I could not read whether AMZN would trade higher or lower.  And my charts were not definitive.

A few times I thought I could read the tape and made plays around 86.60.  The results?  A short term short in front of 86.60 ended in a loss of 25c (and my entry and exit prices were much worse b/c I couldn’t get this seemingly liquid stock at the price I preferred).  A long above 86.60 ended in a small loss.  Ok so now I see a pattern.  The short term longs are losing and the short term shorts are losing.  And our losses are greater than normal.

Now I had a choice.  I could continue to pretend that I could compete against these difficult programs at this price.  This undoubtedly would have concluded with me giving back all of my gains.  Or I could choose a different path.  And so I tweeted:

a great example also of when we shouldn’t play in $AMZN around 86.60 bc of HFT manipulation. wait 4 it to trend then play. but not now.

I waited for AMZN to pick a direction.  Around 86.40 I could read the tape again.  AMZN was headed lower most likely.  I reshorted.  And I caught a nice move down to 85.90.

HFT makes our trading more challenging.  There are set ups and time periods we need to avoid, such as AMZN 86.60.  But trading is trading.  We look for strong stocks and get long.  We search for weak stocks and get short.  Yes HFT shakes us out of more positions.  Yes it is harder to get stock.  And yes it would be nice if HFT were not as prevalent.  But guess what?  HFT is here.  And it will only grow.  So as a trader I must adapt.

But we as traders can limit their impact through our own trading.  We can choose not to play when HFT eliminates our edge.  If you go to a local restaurant and they charge too much for what they offer, then most of us choose not to revisit.  And we can do the same when we spot HFT.  If you do not play then they cannot take your money.

Now that does not mean that adjustments should not be made to HFT.  There are solid arguments being proffered that changes must occur.  Manipulation has no place in the markets.  And we should all have access to the same order flow.  The market should reward the best traders and not those with an unfair advantage, such as access to exchanges others of us cannot reach.  But we can all still compete even with all this HFT.

When we went to 1/16ths back in the day I heard this was the end of intraday trading.  When we transitioned to pennies I heard that it was all over for the intraday trader.  When Hybrid was introduced this was supposed to be the final nail for us.  When programs entered our markets this was supposed to manifest our dissolution.  Some traders were forced out during each of these changes.  But good traders adapt.  They find new patterns to exploit.  HFT will not be our ruination.  It is just another market challenge that we must learn to overcome.

I would like to see some changes made to HFT.  But you know what?  If things remain the same, then I will adapt.  Today I am at the office on Saturday ripping through some charts for excellent set ups on Monday.  And now that SPY closed above 96.10 on heavy volume, I like the way the market is set up.  This is a market overflowing with opportunity.  I will figure out how to make money even with the HFT.  I am a trader.

*****Tomorrow I will answer some questions that I have received about Reading the Tape.

Enjoy your Saturday! Don’t forget to follow us on Twitter!