What is the future price?

Cisco closes below $20 today and my inbox gets inundated with emails asking, “How low it will go?” I pulled up the spread sheets to run my pricing probability indicators, which performs analysis based on a number of statistical indicators, volatility information, frontier calculations, and Monte Carlo probability runs. Keep in mind that historically this method is fairly accurate for 30 day and under periods and not very useful for 90 days or more in predicting price probabilities.

CSCO is showing that it has a 17% probability of hitting $18 in the next 30 market days and a 28% chance of hitting this price in the next 90 market days.

Flash Crash – Algorithms Gone Mad

Sometimes it is worthwhile to revisit the past; especially when trying to avoid the same fiasco in the future. High Frequency Trading has now reached levels representing over 80% of the trades on most market days. The common depiction put forward by these firms is that they provide liquidity that helps the markets. The harsh reality is that their trades are actually cutting in front of line of retail orders causing investors to get cheated when they buy or sell.

The details of High Frequency Trading has been shrouded in mystery; now the curtain is being pulled back thanks to firms like Nanex; a company that captures market data. Nanex has posted an extensive analysis of the Flash Crash of May 6th.

Not content to limit the information to May 6th, the Crop Circle of the Day by Nanex is an interesting graphical chart of HFT algorithms at work each day. Some of the charts are fascinating and simply make you ask “what is going on and why”. Are these the key algorithms at work or are they simply making noise to cover up other trades? Are these a type of coded communication between firms to manipulate the market? Are some of these algorithms simply bugs? Should Quote Stuffing be banned? And does the SEC ever look at this activity? An endless train of questions can be arrived at.

Maybe the key to winning in the markets is decoding what these algorithms are attempting to do. Many simply swing at hyper speed spewing thousands of quotes per second across various price ranges switching between bid and ask. Should the new fantasy of an individual trader be creating a software bot that will “go to war” with these algorithms and steal profits from the HFT firms.

Probably by the time that any retail trader figures out the magic, the government regulatory authorities will come down on the HFT firms and limit their activities. It is becoming clear that hyper trading activity accounting for the vast majority of the trades does not lead to orderly markets and easily can cause more Flash Crash scenarios when all the computers pull their bids simultaneously.

Quick News - Structured Finance

Structured finance came to the front in the press today as more hedge funds disclosed trading losses relating to CDO bets in the market.