The last time we met with billionaire Steven A. Cohen, he was trying to keep his hedge fund SAC together and himself out of jail on insider trading charges. SAC collapsed, and Mr. Cohen made a deal with the SEC to stay out of public money management for a period of two years. He now has a new company, Point 72 Asset Management and he has decided that he has had enough of High Frequency Traders (HFT) taking money out of his pocket. He has decided to do something about it. His firm is the first investor in a new “Dark Pool” that is being created by Imperative Execution Inc. He feels that he can save millions by participating in the market maker process.
A couple of things need to be known before you can evaluate whether his endeavor will work. Market makers are like slugs. If you cut them up one part keeps moving. HFTs are the electronic version of old time pit traders such as myself. The HFTs use computers with sophisticated algorithms to try to pick up patterns when large orders are being fed in the market. They then “race” the order with the hopes that they will be able to benefit by the temporary price dislocation.
Dark Pools on the other hand do not have an exchange backing them. You enter your order in the pool and if it is hit the other side takes the risk of making or losing on the trade. This area is dominated by large banks and hedge funds. But like our friends, the CODs from the housing bubble are on the other side and must make good on the trade or the whole market collapses. Imperative Execution IEX is entering a market with thirty or so other dark pools and numerous exchanges.
So far IEX is a niche player handling only about 2% of the trading in Dark Pools but Mr. Cohen never plays small and there is no reason to believe that he about to do it this time. HFT serve a purpose. They provide an exchange driven market that guarantees the trade. Doing away with market makers will be tough as they are willing to provide a two-sided market and have been a mainstay in the business for over 150 years. My bet is that Mr. Cohen will make money as usual but the HFTs will be here long after he is gone.
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph.
Someone told me I can write credit put spreads to hedge my portfolio. Is that correct?
As the option markets have evolved over the past 25-years, the use of weekly options has gained acceptance. This allows many investors the chance to use weekly credit put spreads in combination with longer based serial puts to create a synthetic short position in the market that has very little or no time decay. This wasn’t possible even five years ago, but it is now a strategy that I teach to students that want to learn advanced trading and protect their individual stocks or portfolio from downside risk. The principal is simple. You use the credit spread to finance the long-term stock position. If you are correct and the market is going to fall, you limit your risk to a small percentage of the position. If you are wrong and the market continues to rally your hedge pays for itself and you collect almost 100% of the gain in the underlying equity. Optionomics offers a weekly subscription service, ‘The Low Cost Put Hedge Strategy’ that uses this technique to manage a portfolio of up to twelve positions. Check out the details on the Optionomics web site.
The Wise Guy Report: The View From The Electronic Floor
Each week I talk about how the Wise Guys (floor traders) are finding soft spots in the market to take advantage of price dislocations in one of the following major commodities: Gold (GC), Crude Oil (CL) or Long-Term Interest Rates (ZB).
Crude Oil News Continues To Dominate The Market (Blow off)
US equities have settled into a pattern of congestion as they continue to work their way through rising crude oil prices, trade embargos, military action in Syria and ten jillion other problems. U.S. indexes for the week were mixed with most showing a slight loss but the tech heavy Nasdaq and the DJIA posted modest gains.
The real news was in the Crude Oil sector as the near-term contract made new highs, slightly under $70 a barrel before backing off and closing the week at a little under $69. I still think that the rally will end when the U.S. Frackers get back up to 100% of capacity but so far, the market is proving me wrong. One encouraging note if you are a bull is the extreme ‘backwardation’ which occurs when the deferred strike price is lower than the current strike. This condition has started to ease somewhat as the year over year contract has come in about $2 a barrel during the past week. Watching the backwardation is very important as the more it closes the more likely we are in for a bigger bull market. If it widens again it could be a sign that the top is either in or close to it.
Get Your FREE Two-Week Trial Subscription
I offer a FREE Two-Week trial to the various subscription services with no cost or strings attached. Each strategy is explained in a 5-7 page booklet which includes sample weekly recommendations and model portfolios. I doubt that you have ever seen anything like this. During your FREE 2-Week trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab at the top on the Optionomics’ Home page to access the informative booklets and then sign up for one or all of the weekly subscriptions.
- Bullish – Bearish Credit Spreads: The nuts and bolts of trading weekly credit spreads.
- The 21st Century Covered Calls: A modern day alternative to the old fashioned covered call strategy.
- The Low Cost Put Hedge: Sleep at night knowing your portfolio is protected for little or no cost.
- Earnings Trades: Trade potential big movers with little or no downside risk.
- The One Day Wonder Trade: Get ready for some real action. A one day trade with great results.
Each Monday morning by 10:00 EST, the plays for the upcoming week plus updated model portfolios for each strategy are posted on the site. The prices in the reports are Monday morning’s opening prices. In addition, I have a webinar on Wednesday where I discuss various option strategies, what is happening on the floor and answer any questions that you may have. Don’t worry if you miss the show. They are archived on the site. Sound Good? Good! You can subscribe to one or more of the subscriptions for only $20 per month on a month to month basis with no contract or strings attached. I think you will agree that this is a super offer so give it a try. Click on optionomics@marketedge.com to access the Optionomics LLC web site and get started today doing what the pros do – “Sell Them – Don’t Buy Them’.
Mr. Seifert