What is the Trigger?
Research for Online Investors

02/15/12

The market rallied yesterday AT EXACTLY 30-minutes before close.  We were not on guard as we had passed the one-hour before close time without buying pressure.  Was it the announcement that New Democracy leader Antonis Samaras would sign a document in support of the austerity measures, or something more sinister?

We think more sinister.  The market today sits on a precipice at all times. High speed computers are checking every trade and block order looking for an anomaly.  When they see an outlier, the computer programs takes over issuing buy or sell orders.

You and I don’t understand it.  We may be able to identify support and resistance levels where program buying will occur, but the “on-the-fly” decisions are beyond your editor’s abilities.

Even if we knew what they were looking for, we couldn’t process information fast enough to compete with them.  We only see the vapor trail of their actions.  The high-speed computer rooms see every order as it is submitted to the market.  We don’t see it until it hits our screen as a trade.

If you have “Level II” access, you can see orders.  But can you tell if ten orders all hit at the exact same time?  Did they all come from the same terminal in Chicago?  This is what high speed computers do.  They analyze the order flow and “see” information they have been programmed to be on the alert for.

No matter what your trading platform, you don’t even see a market order until it has executed.  It is a little late then.  The high speed computer sees it, processes it, and triggers an action based off the trade if a programmed parameter has been hit.

If you knew what the parameters were, could you use this information to fake a computer into trading?  Yes.  Is it any wonder the programming that individual houses use is considered a competitive secret?

We have written before about the Plunge Protection Team.  During the credit crisis market in 2008 and 2009, there were rallies that came out of nowhere.  Sometimes it was as if a hidden hand was moving the market.  The Fed has never admitted nor denied that efforts have been launched on their behalf to support the equity market.

If I had an even rudimentary program for a high speed computer, then I would know what triggered aggressive buying action.  Could I use that knowledge and with a small amount of money, trigger a rally in the market?

The answer is yes, and it happened yesterday.  A few buys at exactly 30-minutes until close triggered a buying frenzy.  In the previous five and a half hours of the market day, approximately 500,000 shares traded on the NYSE.  250,000 shares traded in the last 30-minutes!  All of it could have been started with a block by of as few as 50,000 shares of SPY.  Volume spiked double that, but that is the amplification effect of high speed computers.

What is the trigger today?  Apple.  The tech company’s stock has been in a parabolic rally for the last three weeks.  All good things come to an end.  Today AAPL fell more than $10.00 from its all time high.  It had not done this since the day after its gap up on 1/25.  The stock is toying with a $25 dollar drop as we send this out.  Since AAPL is now the largest corporation in America by market cap, it makes up a large percentage of the indexes.

The recent resilience of the markets has been supported by AAPL moving higher every day.  The next few days show the markets to be a victim of the same effect in reverse.  We had been toying with buying puts on AAPL, or shorting it outright.  The risk just seemed too great.  I don’t like lying down in front of a freight train.

Every high speed train ends in a wreck, and the AAPL train will be no different.  Be careful, the computers are watching.

Quote:
There ought to be one day -- just one -- when there is open season on senators.---Will Rogers

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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