Tag Archives: computer trading

Stock ‘fear gauge’ flawed, Equity Trading Chief says

 

Excerpts courtesy of Simon Jessup, Reuters  

MarketsMuse Editor Note: Yes, the headline and the article are both elementary observations for many; yet there remain many others (including investment managers) who misunderstand the meaning of VIXreuters

 

 

Investors seeking to predict the magnitude of share price moves at times of market flux may get a faulty steer from a closely watched “fear gauge”, one of investment banking’s top equity traders has warned.

Citi’s Mike Pringle, global head of equity trading at the third-biggest U.S. bank, told Reuters that the VIX volatility index , is now as much a traded asset as it is a guide to investors seeking protection from losses.

The VIX reflects Standard & Poor’s 500 .SPX options prices and, therefore, expectations of future market moves. The idea is that as people become fearful of losing their money, they are more willing to buy a put option as protection.

At the moment, it remains at very low levels.

“A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it’s an asset class and it’s more traded for yield than protection,” Pringle said. “It’s still relevant in extremes, but not in a normal functioning market,” Pringle said.

While persuading others of the VIX’s flaws is not easy, Pringle said Citi’s handling of risk management in equities had been restructured accordingly.

Rather than relying solely on the VIX, Citi traders and clients can turn to their “Central Risk Desk”– through which a large proportion of its trades are routed.

The computer programs that underpin the desk’s activities assess around 60 measures of market stress and timing – from global risk arbitrage spreads to dividends to repo rates – to get a better read on sentiment, behavior and deal timing.

Looked through this prism, there is greater risk currently in global markets than the narrower VIX is suggesting.

For the entire article from Reuters, please click here

Buy-Side Traders Making Peace With Computers; Re-Embracing High-Touch.

Solid  WSJ article courtesy of reporter Telis Demos (Jan 27 WSJ).. MarketsMuse has taken liberty and extracted most interesting observations..

wsjlogo“…. In recent years, a computer typically would have swiftly matched such an order with a buyer, sidestepping trading floors altogether…..But more recent soft trading volume has left many traders unable to move stock as quickly as they might like…”

A decade of promoting electronic stock dealing has reduced banks’ costs. Even so, financial firms are facing renewed profit pressure, as market volumes sink and new rules crimp financial firms’ capacity to deploy capital and take risks. ..”

One response has been to bring humans, long on the defensive in the stock-trading business amid cost-cutting and productivity-boosting efforts, back into the loop in a bid to move shares that otherwise might sit untouched.

As a result, banks are combining electronic and live trading businesses in a way they haven’t before….

Banks say clients still will have to opt into hybrid trading services that combine human eyes and electronic systems, and can continue to use separate functions if they prefer. Cheyenne Morgan, analyst at Tabb Group, a consulting firm, said banks are “working with clients to figure out what the right balance would be” between electronic and traditional trading…”

Commenting on the WSJ article, a senior trading specialist at WallachBeth Capital, a boutique execution firm specializing in ETFs, single stock block trading and options execution for institutions and hedge funds stated, “Its nice to know that the media has re-affirmed our firm’s business model, which has always been based on what we call the HT-Squared principle;  a combination of high-touch human intervention coupled with leveraging advanced trading system technology.”

That trader added, “The notion of relying exclusively on computers and algos has certainly proven popular during the past number of years. The obvious concern is whether relying on robots is appropriate for those obliged to secure real best execution, which means capturing market color not available on screens, and prices that will never be displayed on a screen, but are attained through discrete navigation.”