Gaming HFTs Part II: Thunder & Tumbleweeds


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With the equity markets trading at four-year highs, one would assume the volume would also be keeping up. However, that is not the case as depleting volumes are trading at five year lows. In Part I of Gaming HFTs , I pointed out that computer driven algorithm and high frequency trading programs account for upwards of 70% of the actual daily market volume. These programs strike in spurts at specific price levels to magnify price movement at the least cost. This has resulted in a market environment that sees massive volume in compressed periods of time before returning back to light volume. In essence, this market produces thunderous volume generating fast momentum, which then falls off a cliff to tumbleweeds. Thunder and tumbleweeds is the new market environment.

The major pitfall of this environment is stepping into that riptide of volume by chasing price and then getting trapped in a position, when the volume and liquidity dry up. Chasing thunder and getting trapped in the tumbleweeds is the common pitfall in this market.

The trick to is to exit into the thunder before the tumbleweeds set in and then stay out of the tumbleweeds. While thunder can strike on any given stock at any given moment during the trading day, the market in general tends to have one single constant specific period of thunderous volume daily, that is the market open.

The first 45 minutes of the market open from 9:30-10:15am get the most volume of the day consistently, with the exceptions of FOMC rate decision days. It's the first opportunity for the general public to react to news and developments. Many key economic reports like ISM, CPI and Michigan Sentiment get released in that time period. The volume tends to peak and then get second wind up after the initial period from 10:15am to 11:00am. That first 90 minutes is where the thunder forms and turns to tumbleweeds. This is where the biggest windows of opportunity exist to make profits and quickly. More importantly, this period also allows for opportunities to recover losses just as fast, if one is assertive enough. When one mousetrap fails, another one can be utilized during this window.

After the 11am hour, the opportunities fade as the volume and liquidity fades. This doesn't means prices don't move, they just don't move in a trade-able way as choppiness and wiggles tend to overwhelm on light liquidity. Although volume tends to pick up in the last hour, much of the transparency in the markets has already been generated so the price movement can be just as choppy.

Perfect Storm

Hours and even days worth of price movement can be found during this period and that's where traders should focus on. In this market environment, when you trade is even more important than how or what you trade. A day's worth of gains can be made in a 10-20 minute time span, which frees up the rest of the day to pursue other activities. That's something everyone can appreciate. Tip the odds in your favor and stick to the thunder periods (9:30-11am) and avoid the tumbleweeds.

(c) 2012 Benzinga does not provide investment advice. All rights reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
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