Saturday, April 25, 2009

Thoughts on NYSE TICK and Significant Buying and Selling Activity


Recently we've seen speculation that program trading activity, particularly initiated by Goldman Sachs, has been dominating markets and perhaps contributing to recent market volatility. If program trading is indeed expanding and contributing to volatility, we would expect the volatility of the NYSE TICK (which moves higher and lower as baskets of stocks simultaneously uptick and downtick) to be expanding. At least during 2009, my data show that this has not been the case. The standard deviation of $TICK has not been higher lately than earlier during earlier in the year.

Above we see a one-minute chart for the S&P 500 (SPY) and a moving one-day total of minutes in the market when $TICK is greater than +800 (pink line) and when the moving one-day total has been less than -800 (yellow line). This has acted as an interesting overbought/oversold measure: when we've had a notable plurality of buying or selling minutes over a one-day period, we've seen reversals.

Tracking the number of significant buying and selling minutes as a day unfolds has been a very handy way of gauging the general sentiment toward stocks. A relative absence of significant minutes has suggested a more range-bound, less directional environment. A useful adaptation of this notion would be to define significant buying and selling minutes in Market Delta, based on the proportion of relative volume that occurs at the market offer and bid.

Another pattern I've noticed is that the number of significant buying minutes tends to peak ahead of price: as buying dries up late in a rally, we see fewer very high $TICK readings. Note that the most recent rally has occurred with fewer significant buying episodes.
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5 comments:

fiki said...

Dr Steenbarger

Still a suspicious amature like my self can´t help but think that even if program trading hasn´t increased notably, the volume during the rally (specially i april) seems to be less than average, why the program traders should have more market moving capabilities than usaual since their presence seem to be constant.

Great post as always.

Adam Brooks (tortexal in chat) said...

There is quite a bit of program trading occurring in pre market and after hours that utilize "dark pools" of liquidity so as to conceal orders and sizes. As a result, none of this will be reflected in $TICK

love the blog and the books!

fiki said...

Adam,
Care to explain these "dark pools" of liquidity? I´m not shure I follow...
Thanx,
Filip

Adam Brooks (tortexal in chat) said...

more info:
http://en.wikipedia.org/wiki/Dark_pools_of_liquidity

Brett Steenbarger, Ph.D. said...

Hi Adam,

Yes, TICK only captures what is occurring during regular trading hours for stocks--

Brett