Some Potential Implications of Program Trading
July 4, 2005
On June 18, 2005 TraderMike alerted me to an article by Alan Farley asking "Was This Spring's Rally Manipulated?" I thought the article was a strange way to demonstrate manipulation. I posed my questions and doubts to Mr. Farley, and he essentially said that the big boys were manipulating the market by staying out of the way while retail suckers continued buying away. But who is really in control of the market? Do retail players exert much influence?
The NYSE's statistics on program trading demonstrate to us that the vast majority of trading that does occur day-to-day must be institutional. Just in the last two years, this program trading has leapt from 30-40% of all trading to the current range of 50-60%.
After I charted this data (see below), I became more intrigued in the outliers in the data, that is, points where program trading significantly deviated from the recent norms. I juxtaposed these dates with the S&P 500 and discovered what could be some interesting insights. If recent history holds true, the S&P 500 will at best stay stuck within current ranges for the rest of the summer and will likely decline from 4-5% over this time period. Such a decline would take the market right back to the lows for the year (how convenient, eh?). Regardless of what actually happens, take note that since 2002, late June has marked large spikes in program trading. Looks like the big boys do not dump in May and go away…they wait until June?!?!
Be careful out there!