Financial Gossip

European indices have started the week in a buoyant mood, as some of the major banks have released extremely healthy profit numbers. A far cry from profit expectations in this sector 18 months ago, but if you were able to continue to lend at 5% + and borrow at fractions of 1%, you would be doing quite well also.

Still, these results are a sufficient catalyst to take the equity markets even higher. And with mid summer looming, these equity markets could continue to rally for the next 4-6 weeks. In fact some of our high net worth clients are expecting another 5% or more on the FTSE 100 Index, before reality checks start creeping in sometime in the autumn.’

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It is said that good news often comes in threes, and there is one plc and CEO that certainly need it; namely BP and Tony Hayward. Firstly, it is possible two American oil giants, one being Exxon and the other maybe Chevron, are queuing up to buy the company, lock stock and barrel ! Secondly, the British oil plc has started refitting a new larger cap, which is hoped to stem the lethal flow of oil, still gushing into the Gulf of Mexico and onto the neighbouring shores. This is a one step back and two huge leaps forward scenario (hopefully) as the existing cap will be first removed, creating unhindered flow, while preparations are made to fit the new cap, which is hoped to completely stop the leak.

And finally for the chartists; the share price has popped its head above a trendline which has shown resistance since the price commenced its fall in April of this year, when disaster struck.

This trio of good news should provide the BP share price with some underpinning as fresh buyers and take-over speculators returning to the market. Even though the share price is 20% off its lows, it is still 44% off its highs; partly justified by the liabilities and compensation payments, but still leaving room for some decent upside…

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A very quiet weekend on the financial side, so traders are finding few reasons to smash the markets once more, this morning.  Not only this, but the US is also off for its Independence Day celebrations, which is likely to make this afternoon’s session particularly boring.

Traders are slowly buying back into equities, having battered the lows to no great effect through Thursday and Friday. The Non-Farm Data was as grim as expected, and there is a small feeling of “sell the rumour buy the fact” going around at the moment.  Interestingly, while the press and trading floors worry ad-nauseam about a ‘double dip’ recession even the most bearish of economists seem not to agree.  Yes, we are probably not going to roar out of the traps, and recent data has shown that huge debts do have to be paid back in hard work for little return, but this is a long way from an actual slowdown.

For the UK, the big crutch for public confidence has always been ‘property’ and this is possibly our weak spot.  Outside of the racier bits of Central London, the spike from the lows of 2009 seems to have run out of steam. Sellers are not willing to reduce prices, but buyers are unwilling to pay up (and banks even less willing to accept over-valuations).  In conversation with a developer, he was moaning that the only sales that seemed to go through were forced actions – divorce, death, relocation or redundancy, where the sellers were willing (under duress) to come down.  With the Public Sector likely to become a net-shedder of jobs over the next three or four years, the supply of new buyers onto the bottom rung is liable to be a tad thin on the ground.  As house activity tends to feed down into the rest of the economy we can foresee, if not weak demand, then certainly subdued activity.

This morning sees the FTSE, almost unchanged at 4835, having attempted a move higher, already reaching 4860 in early action.  As mentioned earlier, there is not much activity going on at the moment and this is unlikely to change today.  It is always difficult on days such as this to try to speculate on the coming session, as sometimes the lack of liquidity creates big swings and on others trading floors just give up the ghost and we drift through the day.  With the trend definitely bearish at the moment, the easier direction to cause a panic would be down but (on the other hand) there are probably a goodly number of weak shorts out there just begging for a short squeeze to push them out.  With the sun shining brightly, the bars around the city will probably be the only winner in the end.

Currency markets are similarly moribund, with most crosses hardly moving so far.  The Euro/USD has had a thrilling 40 pip range since opening at ten last night (FX traders East of here across the world must have had one of the most boring Sunday Night/Monday Morning sessions for months). The Euro has recovered above the 1.2350-1.2450 level and even reached 1.2610 on Friday, as shorts were mercilessly squeezed into submission. This morning it is drifting marginally, but seems unable to fall below 1.2520/25.  We are seeing buying at this point, but traders are putting very close stops under this mark as well.  If the cross pushes below 1.2520, we may see renewed weakness, but for the time being the bulls seem the more confident.

Sterling has likewise recovered versus the Greenback, and we have finally made it back to the pre-election levels (we closed at 1.5095 on the 5th May).  While this is all very nice, it does have a feel of markets moving in a particular direction simply because they can’t think of anything else to do. 1.52 has been (pretty much) the median/mean point since the pound fell out of bed back in late 2008, even the mid-point of the low high since then (1.35/1.70) is only a few pips away at 1.5250.  The disappointing activity has been fact that the pound has been drifting against the Euro in recent days, falling from a high of almost 1.24 down to the current price of 1.2100.  The one major factor in the UK’s favour is that its problems are solvable by itself and the country can determine economic policy to suit itself.  Spain, Italy, Ireland, Greece etc are stuck in a monetary straightjacket that is controlled by stronger economies (Germany, France, Holland etc); for them the future appears bleak indeed.

Oil continues to fall from the high 70’s and the ease with which it fell through 75, 74 and 73 bucks down to the current price of 72.30 bodes ill if further poor economic data comes down the line.  There is support at 72.00 and 71.60, which may hold depending (really) on other markets, but one does begin to worry about the cost of continual long trades given the calendar month rollover costs.

Gold made a spirited attempt at $1200 on Friday, but the knowledge that the 1196 support had held so effectively on Thursday probably weighed on the minds of the bears. This morning there is very little to go on with the metal unchanged on the session. Support is (as mentioned) at 1196, but there are a wealth of failed attempts to break lower in the 1200/1215 range over the last month or so, which may give the bulls the strength to attempt to regain the initiative. A close back towards the high teens may be all they need.

This article was written on behalf of Capital Spreads. Please click here for more information on  Spread betting or Trading Platforms.

Investors and market commentators are concentrating on the recent data out of the US and China and coming up with doom-laden prognoses.  Readers will note that many of the reasons cited for the recent falls were commented on by us well beforehand.  While I am not an outright bear on the economy, this does not mean that investors fear will not drive the markets further than common sense would indicate. Yes, US data is looking weaker, but we must compare this to the slightly suspicious levels it was apparently being reported at for the 4th Qtr 09-1st Qtr 10. Virtually anything is going to appear grim against that.

The performance of the FTSE for the 2nd qtr 2010 is apparently its worse quarter since 2002, which is something of a surprise, as most would have thought that some periods in 2008 would have given it a run for its money. Yesterday’s failure to make much headway probably also had a bit of ‘half-year-enditis’ about it.

This morning sees the FTSE called some 85 points lower, after US and Far East traders decided that discretion was the better part of valour. Our quoted low overnight even managed to reach the low price of the Fat Finger event back on the 6th May, which should please the chartists amongst us. Equity yields are looking ever more attractive as inflation fears decrease (at least amongst Central Banks) and cut expectations of near-term rate hikes. The UK looks likely to be stuck with sub 1pc base rates for some time. On the lending note, the brief rally yesterday on the announcement that the ECB was ‘only’ being called for some €160bln 3mth lending was strange indeed and our dealers were perplexed as to how the news that a huge number of banks were still being forced to borrow at 1pc (money rates for €3m ae at around 0.75pc), due to lack of borrowing facilities in the open markets could have been considered ‘good’.

For those of you looking for a major blow out or a confirmed double-dip recession, I fear that the wait might be quite a long one.  Things are difficult, but we should remember that most economists and analysts are still reasonably optimistic about future direction.

Not only this but the ‘Canary in the Coal Mine’ products like Long Term gilt prices and Gold are stubbornly refusing to push higher. It appears that not every financial sector is quite so terminally pessimistic.

This said, we must obviously take into account the current bear sentiment and not get too aggressive in any direction. We always say that if you want to make a £10 bet, you should actually just do £5. In the current environment, we would advise you to cut this even more.  As mentioned the FTSE hit the previous quoted low for the year and we see this as possibly good support, as are the lows of yesterday around 4830/35. But the next major target for the Bears would be the 4695/4700 failure levels of Nov/Dec 08.

On the currency-side, the Dollar is naturally gaining some strength as woes over global markets rear their head again. The Euro still seems reluctant (though) to trade much below 1.2200 and the Pound is likewise seemingly not keen on giving up too much of its recent gains.  Cable is now at 1.4890, with traders buying into the move lower obviously hoping for a retracement to the 1.50 level. There is good support at 1.4885 from the short-term bull trend line and then at 1.4855 from previous lows on moves down, but traders should beware a break below these as it may signal a return to Sterling weakness.

The Yen remains the strong man of the majors, which appears slightly odd given the country’s fiscal position and the Euro/Yen cross is still flirting with the nine year lows around the 108.00 level. We have had several attempts over the last three days to close under this mark but, even with an intraday low of 107.25, last gasp moves have always regained the level. This morning we are once again below 108.00 (just) and it will be interesting to see whether a close can be achieved below this point.

Gold remains near to its all time highs (1264) at 1240, but the woes of the equity markets do not seem to be, as yet, triggering another surge in the yellow metal. We seem to be trading around a mid point band of 1238.5-1240.0 either we are in a small range just above this or just below it and then remain in that range for hours at a time. Attempts higher are swiftly defeated, but the same can be said for moves down as well. A bit trite, but we are probably looking for a break of 1246 or 1234 to give us a bit of excitement.

Oil has finally started to show some reaction to the perceived possibility of another slowdown. Slower growth with increased production means lower prices. But we will really need some real economic data to send us significantly under the 75 dollar level, which was finally breached earlier this morning.  This is the one market where we might expect price action fireworks in the near-term as a recovery in equity market sentiment might send us swiftly back to the 80 buck level, or continued pessimism may put heavy pressure on longs and force us back to the 68.50/69.00 support.

This article was written on behalf of Capital Spreads. Please click here for more information on  Spread betting or Trading Platforms.

Direct Market Access, otherwise known as DMA quite simply ‘does’ what it says on the box; less simply, what actually is Direct Market Access?

So, DMA gives you direct access to the market, simple enough. More importantly are the advantages that DMA gives a trader, which are often key to finding that all important edge in trading today’s financial markets.

Let’s look at the simple diagram below to see the two main types of price and execution service which are on offer for those wishing to trade. DMA & Market-Making (M-M).

As you can see the key differential is that DMA gives you access to a market place where thousands of market participants compete to trade. These participants include individuals or institutions day trading, hedging, speculating, or investing. Institutions such as pension funds, insurance companies, banks. In fact most institutions need access to the financial markets in some shape or form; especially ones who derive revenue from overseas or indeed buy resources from overseas. MM by contrast is a market place with just ONE market participant – the single market-maker/dealer. And some market maker systems will have dealer intervention, which results in slower execution speeds and probably re-quotes.

The advantages:

PRICE TRANSPARENCY

An everyday comparison of the above could be the price comparison websites for insurance Vs the single insurance company. What could be better than having access to all the different prices offered by loads of insurance companies for any particular product? This gives buyers the ultimate in price transparency, producing extremely competitive prices for shoppers. The fact that these price comparison sites are abundant for not just insurance but flights, holidays, car hire, electrical products is evidence of their popularity and benefits; in fact such sites are available for practically any product you could think of, including electricity providers!

Well the same price transparency exists with DMA trading, where having access to thousands of these participants gives competitive prices and super liquidity. If the price given to you is just from one provider or market-maker how do you know it always reflects the price of the actual underlying product….and rarely can a single provider offer the same liquidity that an actual market place can, especially in volatile markets!

SPEED

With pure DMA there is no intervention by a dealer. So when your order is submitted it travels directly to the underlying exchange, without any order routing or intervention. This increases the speed of execution considerably. This is one of the main reasons City trading houses use DMA technology as low latency is crucial when dealing with volatile markets, and institutional traders need to know they can execute their orders in a fraction of a second. Also algorithmic traders, whether institutional or individual insist on DMA as their execution method, as any re-quotes or latency will inevitably produce an extra trading cost/slippage which could make a profitable system unprofitable.

DEPTH OF MARKET

With a DMA system you can view depth of market, which shows not just the best bid & offer available, but also all the orders below and above the market. This allows you to gauge liquidity on both sides of the current price and time you order entry accordingly.

Below is a screen shot showing the depth of market on the ProSpreads professional platfo:

This screen shot is for the FTSE 100 and shows the orders by volume available at each ½ point above and below the price of 4805.5. This depth of market screen (often called a ‘ladder’) is the most popular way to execute orders with a DMA platform. It allows a trader to see all the orders above and below the current price and actually place any order on the ladder itself; whether it be a limit or stop order. This advanced trading functionality also gives day traders a visual representation of their position, as entry and exit levels are visible on the ladder itself.

The good news is DMA is now available to all traders; not just the pros sitting in the City trading houses, but all of us. And if those professionals are using it, then that surely speaks for itself…

This article was written on behalf of Capital Spreads. Please click here for more information on  Spread betting or Trading Platforms.

Today’s markets pose significant challenges to those seeking trading profits; despite the volatility experienced over the last couple of years. In contrast, markets of 20 years ago held a plethora of trading opportunities, often obtainable from trading just one product or even one stock. So why have things changed so much? Quite simply we have more market participants embracing ever changing technology resulting in a more mature market where opportunities are not so apparent and need to be weeded out and traded with the ultimate precision and efficiency.

That’s not to say that opportunities don’t exist in abundance in some of the emerging marketplaces; but here exists a notoriously volatile and illiquid climate, often taking control away from the trader.

To maintain a degree of control, we need to focus on the more mature markets, where our trading can follow a pattern ensuring swift and accurate execution of our directional orders.

So how do we find these opportunities and how do we trade them?

Strategy & Signal Generation

Firstly we need to define our trading strategy. This ultimately means identifying what set of circumstances result in us deciding to enter and exit our trading position.

We could spend hours manually scouring charts or fundamental reports looking for instances where our strategy criteria fit. But that is unrealistic, so we need to utilise the scanning technology available. If we have a predefined strategy and an automated means for searching for products where our trading criteria fit, then we are half way there. We all know that to have a strategy is crucial for successful trading; however the means by which we execute that strategy is of much greater importance. It is fair to say that you can succeed with an average strategy and excellent discipline but not with an excellent strategy and average discipline. So we need to have a plan, but more importantly, an effective means of executing that plan.

When we have our plan or strategy we can code the rules into a software programme, which in turn analyses market data, and generates our trading signals based upon our predefined trading criteria. Here our trading system is born.

Back-Testing & Optimisation

Fortunately we do not need to be computer programmers to be able to turn our rules into code, as many software programmes have easy to understand language and wizards to take you through the process, step by step.

Having programmed our rules into the software, we can back-test these rules on historical data, to see how it would have performed in the past. This is by no means a guarantee of how successful your strategy will be going forward, but it will give you an indication as to the potential of your trading strategy.

By reviewing the back-test performance results, a trader can optimize the variables of his system to refine the profitability. Once again, some of this optimisation can be automated with the software itself identifying which variables would increase the historical profitability.

Trading the Strategy – Simulation Vs Live

We can take our development to the next level since some software programmes allow you to then test your strategy in a simulation environment. Allowing you to trade the market without risking any money is the ‘icing on the cake’ as far as testing a system before going live. However for a few reasons there is never a substitute for actually trading the market. Trading factors like slippage and part fills, which often occur in the real world, can have a significant effect on a system’s performance. Let’s face it, if this automation process of developing a trading system resulted in a guaranteed money making machine, then we would all be sitting back counting the money.

It is often the way we execute the signals that our system generates that makes the difference between success and failure.

We all know that discipline, or more accurately a lack of discipline, is probably the number one reason some traders fail to make money and after all, we are human and prone to emotion, which is more often than not the catalyst for poor and irrational trading decisions. The problem is that discipline is not always easily learnt, and certainly not overnight! However there is an overnight solution to adhering to a trading strategy and that is ‘Automated Execution’. It is incredible that even when our trading system is shouting ‘buy’ or ‘sell’ we still sometimes struggle to pull the trigger as our emotions on what we ‘think’ is happening in the market take over and result in us avoiding commands to trade.

By automating our execution too we have developed a true front to back automated trading process.

Automated Execution

‘Automated Trading’ per se can now be described as the identification of strategy criteria, signal generation and execution of that defined strategy… all automated.

It sounds like we are just generating a computer to do all the work. Well, to a certain extent we are, but the markets are forever changing and we need to have some flexibility in what we do to accommodate those changes.

However some strategies have their logic ‘locked’ away, so that individuals can use or subscribe to those signal systems without full view of the thoughts processes and methodology that are behind them.

Black & White Boxes

A ‘Black Box’ is a term used to describe a ‘closed’ or ‘sealed’ trading system. By this we mean an algorithmic strategy which generates signals in any chosen market; but which cannot be changed or adjusted. It is then possible to have the trading signals executed automatically, without you ever lifting a finger. This is perfect if the Black Box strategy is a good one, and some of the good ones may stay profitable for more than 5 years, but many start out as winners and soon loose their inherent effectiveness and cease to be profitable…very quickly.

An alternative, which is becoming increasingly popular, especially amongst trading institutions, is the ‘White Box’ system approach.

A ‘White Box’ system is subtly different to the Black Box, in that it is your personal algorithms that make up the strategy. The advantages of this approach is the ability to easily tweak or adapt the system to changing environments or market circumstances; whereas a Black Box is closed and does not allow any adaptation to the ‘factory fitted’ capabilities.

Algorithmic trading, in particular using the White Box approach is rife in the hyper- competitive trading world, as financial institutions now feel the mounting need for technology that aids their unique trading style. With the White Box approach it is possible to rapidly compose or evolve algorithms to monitor, analyse and respond to market events in a specific way.

Although the pre-defined Black Box algorithmic strategies are a great place to learn the ins and outs of automated trading systems, the user defined White Box approach had greater flexibility and therefore greater longevity.

The advantages of automated trading

The automated execution has the head line advantage of removing you, or should I say your emotions from the final decision of whether or not to push the trade button. If you believe in your strategy then you should trade it whatever the market feels like at the time of signal generation. To have the link between signal generation and trade execution taken care of by some automated process, means that discipline is maintained even during the most volatile market phases.

• The transparency of most markets means that the edge is harder to find. Automated algorithmic systems can scan multiple markets looking for a criteria fit.
• Trading psychology and discipline are difficult to master. Automatic execution removes the emotion from trading, making it easier to follow your strategy precisely.

The disadvantages of automated trading

Nothing is guaranteed when it comes to trading the markets and guaranteed profits with automated trading systems is no exception.

• If your trading system is not properly coded and tested, then profitability is unlikely.
• Sometimes it is impossible to put certain rules into code, which makes it difficult to develop an automated trading system.

As trading technology continually advances, the race is on to find algorithmic supremacy. As a result some strategies are becoming forever more complex, demanding a greater need for automation. Now that the execution of trading strategies can be automated, the risks of ill discipline and human irrationality have all but been removed.

Simon Brown

Managing Director

ProSpreads

www.prospreads.com

Fact: We all have a view on the market

Reality: Its not always the right one !

Fact: Sometimes our view is correct

Reality: We don’t always make money !

Frustrating I know, but we need to find the right product to trade; and more importantly the right style.

You can imagine the rollercoaster ride than many traders experienced during the volatile markets of the last fifteen months. You only have to look at the daily ranges that indices like the FTSE 100 had in the autumn of last year to appreciate that white knuckle rides are not even the preferred environment of the most savvy of traders.

I remember last October and November, and I am sure you do too, knowing that when the market closed in the afternoon at 4.30pm, it was likely to open either a few hundred points higher or a few hundred points lower, purely dependent on the direction of Wall Street from 4.30pm to 9.15pm.

How can we predict or more importantly make money out of holding a position in a market, which we cannot trade and know is going to ‘gap’ up or down by a huge amount the following morning. Sounds like a massive gamble to me.

Actually we don’t need to hold onto positions forever in the vain hope that we will make a fortune at some point in the future.

So what’s the alternative: a relatively low risk, controlled strategy of buying and selling within very short timescales, taking tiny margins of profit…buts lots of them. Welcome to the world of day-trading

A simple definition: Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions will usually, but not always, be closed before the market close of the trading day.

So who are today’s day traders ? Well, pre-tech boom (& bust), day traders were predominantly self financed ex-bank and futures floor traders, who stood shoulder to shoulder in the open outcry pits of the International Futures Exchanges, shouting and screaming while signalling to each other the prices at which they wished to trade. Mayhem it must sound, but actually there existed a very efficient market place for trading the financial markets. Some of these self- financed traders, otherwise known as locals, would wander down onto the floor, sometimes straight out of  school, hungry to make their fortune… ‘Trading Places’ style.

In the late 90s, technology soon won the exchanges over and these thriving day traders migrated to newly set up ‘Trading Arcades’; providing them with  a professional dealing environment, allowing them to compete with their banking and corporate peers. And these arcades initially accommodated hundreds of ex floor traders who provided important liquidity to the worlds futures markets.

And then the millennium saw a 3 year bear market that took the FTSE 100 from 6950 to 3380, a whopping 51% decline, well within the definition of a bear market (20% decline !) This down move made many active retail investors, who to that date were nearly always ‘long only’ merchants, look for instruments and strategies that would allow them to capitalise on falling markets as opposed to good old bull markets. So the search led them to the derivatives markets, including Futures, CFDs and Spread Betting.

Speculating on intra day moves may mean one or two trades a day or may be hundreds of trades a day. To be glued to a screen , buying a and selling on a second by second basis has created a new breed of trader called the scalper.

A scalper looks for a tiny (and I mean tiny) edge in the market. This may mean ‘scratching’ (buying and selling at the same price)  several trades for every profitable trade.

Many of these scalpers will trade spreads between either different products in the same asset class or indeed different futures months within the same product. This spread trading requires immense concentration as a badly timed tea break could prove expensive !

A short term interest rate futures contract, for example, will have several months available to trade. Day traders will study the fair value of one month against another (spread) and when a big order in one of those months moves the price, then there is an opportunity (if you are quick) to trade the other months before they fall in line again. This is where execution technology is crucial, as there may be hundreds of spread traders trying to do the same trade at the same time.

Similarly, some spread traders, will choose to trade one contract against another. For example, it is increasingly popular to trade one index against another: the FTSE Vs Dow seems particularly popular at the moment.

In the equity markets, ‘Pairs’ trading is common place, whereby a trader will find a stock within a sector that he feels is strong, go long, and hedge it by shorting a stock within the same sector that he feels is relatively weak. So he is protected against a sector fall out and hopes that the spread between the two stocks will widen/narrow in his favour.

Another favourite is in the oil market, where the ‘crack spread’ is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more of the refined products, typically gasoline and heating oil.

Here are two charts: one of the Dow and one for the FTSE 100, over the same period, which was 04/12/09 from 1430 to 1630 (UK Time)

You can see that both Indices moved in a similar direction in each 5 minute period, which is represented by each bar on the chart.

In this instance, the Dow moved and the FTSE followed. This a common theme for the FTSE, once the Dow opens at 1430 every afternoon, and many traders see this correlation as an edge.

Quite simply they will watch the Dow, and I mean watch (without blinking sometimes !) until it suddenly moves, then jump on a trade on the FTSE, knowing that it will most likely follow the Dow.

We saw this at 1500 above, when the Dow moved sharply downwards and the FTSE followed. Looks easy, but you have to be quick with the right technology that will not re-quote you.

Look again at the last 20 minutes (4 bars) on the FTSE chart and you will see that it takes a mind of its own and trades down to the close at 1630, when the Dow stayed steady over the same period.

There could have been a number of reasons for this, but my odds on favourite is the day traders were long and needed to sell to close their positions for the day.

Many think trading is a zero sum game, meaning for every winner there is a loser. But I don’t think this is the case, because you may have a short term day-trader selling to pension fund; the day trader looking for a few points profit and the pension investing its premiums for long term growth.

Whatever your style, there is no such think as free money; but  day-trading can give you an edge and at least allows you to go home and sleep at night, without being exposed to the sharp moves from the other side of the pond.

Simon Brown

Managing Director

ProSpreads

Walking through the streets of London EC3 you may notice a growing presence of 30 somethings. Not pinstriped brokers or chino clad merchant bankers frequenting the coffee houses on dress down day, but designer jeaned young men sporting trainers and five o’clock shadows. ‘Builders’ I can here you muttering – no, they are a growing breed of trading professionals known as arcade traders.

So why have we not heard of them before? The answer is quite simple. These traders are low profile, silent but aggressive and masters in the provision of liquidity. Every day, they enter the square mile before all others and leave quietly as the markets close. But their background could not have been more different. Many cut their teeth in the 80’s and 90’s as pit traders on London’s open outcry futures and commodity exchanges.

As technology transformed their coloured jacket, chaotic workplace into electronic serenity, many of these high-profile traders gently melted into obscurity.

Hence trading on computers finally took over in the late 1990s. With this astonishing transition, these open outcry traders have had to adjust to electronic trading, which is a far cry from the aggressive hustle and bustle of the futures pit; unsurprisingly many have failed and have quietly slid back to their home counties to take up less stressful pursuits.

Those surviving arcade traders are true professionals; both silent and aggressive, they are specialists in their field. Although unknown, they are an essential ingredient in today’s financial markets.

Whether it be banks wanting to unwind large positions or private investors requiring a consistent two way price, it is these arcade professionals who predominantly supply the market. They are undoubtedly ‘the liquidity providers’ and without liquidity, an efficient market fails to exist.

The arcade trader is either a self financed individual, often with years of experience, or a graduate fresh from college with no bad habits. The latter, who initially may be financed by the arcade, can be moulded, taught a strategy and told to execute it like a machine. Some arcades have rows of graduates executing different strategies for trading the markets, some succeeding, many failing. In this Darwinian world, only the fittest, most disciplined survive.

Trading arcades are not a free ticket for those wanting to trade. All prospects are sent through rigorous training and initiation tests. For example, all new recruits may be asked to play various video games to test their ability to react to certain commands and to test their awareness of what is happening on their screens. These two qualities, awareness and ability to react are two of the foundation skills of any successful trader.

So in what environment do these silent traders operate? Well, today’s arcades are state of the art dealing floors, with the best in dealing software and information systems, catering for what can be hundreds of self-financed trading professionals. Orders can leave a trader’s computer, get submitted to a futures exchange in Chicago, executed and confirmation returned, all within a quarter of a second! This speed of execution is essential when these professionals are sometimes executing hundreds of trades a day.

The silent traders will trade anything that moves from equities to commodities to currencies to bonds. Many traders specialise by just trading one instrument, day in day out for years on end, allowing them to ‘get to know’ the instrument so well that it becomes one of the family. They know how it behaves, they understand its moods – ultimately they live it!

Succeeding in a trading arcade is all about having the edge; some traders consult sports psychologists, who are able to teach them the discipline required to be a world champion athlete, some may learn the art of Zen. Whatever works for one trader, may not work for another. What is required in all successful traders is a strategy and the discipline to follow it – easier said than done, I can promise you.

So what is the future of the trading arcade? I believe the trading arcade is the future. Although broadly undiscovered, these dens of liquidity bridge the gap between private individuals and investment banks; without them markets would fail and in some cases cease to exist. Trading arcades are emerging everywhere to cater for the hungry trader wanting to trade his own capital within the professional infrastructure normally associated with institutional dealing floors.

And not just in the UK…. with more and more of these professional traders emigrating to sunnier climes, where the best in trading technology is readily available, coupled with a more palatable tax regime !

Simon Brown,

Managing Director

ProSpreads

www.prospreads.com

Any intervention makes sense at the time. After all it is human nature to try and prevent an undesirable event taking place. Animal preservation for example, and don’t get me wrong, I am a conservationist by nature (no pun intended) but can you actually stop a species becoming extinct once the total numbers get to such a low level? Are we not just slowing down the process to an event that is inevitable?

I believe the same occurs in the financial markets, but with the ‘double whammy’ that intervention may actually increase the severity of the event when it finally occurs.

Let’s start by looking at the Banking Crisis of 2008. We let Lehman’s go but saved AIG, Lloyds and RBS, for example, along with many others, with an aggressive round of quantitative easing by central government. Printing money and dishing it out, for all intent and purposes. But are we not just avoiding the inevitable i.e. severe economic depression as the result of too much debt being allowed to accumulate, not just for corporations, but also individuals? Oh, and with a possible side effect of hyper inflation. I remember the papers talking 10 years ago about the excessive levels of personal debt; and 110% mortgages should have been the real alarm call!

Now in Europe we have individuals, corporations and countries in trouble and we are attempting to bail them out, but with what money? Is it just passing debt around from one country to the next? Sub Prime springs to mind…

In 1992, the Bank of England attempted to support its currency by continuous buying in the vain hope that it would be sufficient to keep sterling within the boundaries of the European Exchange Mechanism. It did not work, resulting in the withdrawal from the mechanism, releasing interest rates to freely float to ultimately where they should be.

So where am I going with this?

Well, Europe is in trouble as a result of several of its member nations struggling with sovereign debt. And we are trying to save them by loaning them more money; loans which got them into this state in the first place. Everyone knows, if you drive across Europe passing from one country to another, you see immediate differences. Language being the first, then culture, values and varying levels of economic prosperity. However, the European Union has attempted to converge these differences by setting the same rules and boundaries for all of them; not forgetting giving them all the same currency? In my eyes this was never going to work; it was just a matter of time before it all went wrong, because the member countries were all at different levels of development, created by differing histories and ethics. It only lasted as long as it has done because we have been in a phase of global economic boom, since the European Union was created almost 15 years ago.

More recent interventions….yesterday the National Bank of Switzerland was rumoured to by selling its own currency to provide support to the Euro. The German Chancellor announces restrictions on ‘short selling’ of some of its own listed companies… I wonder what would happen if we just left the economies to sort themselves out, Darwinian style.

So looking at the markets, and we are all traders at heart, intervention rarely works in the end and often just makes the bubble bigger before it finally bursts.  This means that a breakup of the European Union is more likely than many believe, a double dip, with the second one much bigger than the first more likely than many believe and countries defaulting on their debt and freely floating their economies to where they should be, more likely than many believe. Actually, in the long run this may not be so bad at all and the Euro may well come under renewed pressure, which is great for exports, but only if Europe actually survives.

Lots of questions, I know, but hopefully some food for thought.

Let’s put the spotlight on the FTSE 100. This is the most popular product amongst all spread betters, professional and retail alike.

The index of the UK’s 100 highest capitalised (market) listed companies, (representing over 80% of the total capitalisation of all the companies on The London Stock Exchange) has an interesting history, and with all the uncertainty not just in the UK economy but economies globally, we need to step back and look at the market from a distance; putting everything into perspective.

Looking at the big picture, let’s see what has happened since the FTSE 100 index was born back on January 3^rd 1984 at a nice rounded value of 1000…

The chart above details the meteoric bull run from a value of 1000 in 1984 to over 2400 in 1987. That’s a 140% climb in under 4 years! Then came the 1987 Stock Market Crash in October 1987. I remember this well (excuse me while I reminisce)…

I started as a ‘blue button’ (glorified tea boy) on the stock exchange floor in December 1986, fresh out of school and keen as mustard. The problem was I hardly knew anything about the market (literally nothing). The market was booming, the Big Bang’ had hit the city and trading companies were flourishing, as investors saw the market as a one way bet. As a result the market making company I had just joined had me off the ‘making tea duty’ and trading in the pit on my own by March 1987. Naturally my strategy was one that everyone had used for the past few years i.e. geared to a rising market, so I soon learned just 7 months later that markets can actually go down and subsequently graduated from the ‘school of hard knocks’.

The 1987 crash took the FTSE 100 from over 2400 to 1600 in just a couple of days, wiping out over half the gain of the previous 4 years; then another 2 years to regain those losses. You can’t argue that markets fall quicker than they rise!

The markets continued to rise steadily during the first half of the 1990s, with a few hiccups along the way naturally, mainly caused by speculators looking for another crash scenario. Then came the ‘Tech Boom’ which propelled the market from 3000 in 1995 to 6950 at the end of 1999. Not only was it the end of 1999, but it was the end of the heavily inflated speculation of the impact of the Internet and its potential.

The market plummeted over the next 3 years; and for those Technical Analysis believers amongst you, the market retraced exactly 61.8% from the move of its origins at 1000 to its high of 6950….’The Golden ratio”.

After another boom and banking crisis bust we saw a ‘double top’ (hindsight I know) demonstrating the importance of the market holding that level of 3500/3700 a year ago.

Since those lows the market once again has shown extraordinary resilience and climbed back up to its current levels of 5700/5800. It has been tempting to short this 12 month rally, especially as it has felt that the economic stimulus provided by governments around the globe was artificial and probably delaying the inevitable; however the market has continued to grind higher.

Has this market moved higher on fake stimulus? Are we pulling out of recession? Whatever your thoughts and even if they are right, it does not mean the market will behave as it should. One thing is for sure, quiet stock markets tend to drift higher and its speculators as a whole rarely sell the top or buy the bottom (myself definitely included !). But when the market is short and the markets are quiet, we will go higher. And never has that been more true than the last 12 months. With the markets quiet running up to the UK election, the FTSE 100 Index is staying firm and may well go higher; however I have noticed that the sentiment is shifting from bearish to bullish; which probably means many of the short positions have been closed out and reversed suggesting we may be near the top again.

Either way is it worth keeping an eye on sentiment, because when we start seeing newspaper headline of ‘FTSE 100…set to reach 7000 by year end’, watch out for a down move.

I remember a front page headline 12 months ago when the FTSE 100 was trading at 3700… ‘FTSE 100…heading for 2500’…..

Simon Brown

Managing Director

ProSpreads Limited