Millionaire Traders

JWBK169-Lien July 3, 2007 13:56

Man Versus Machine

A: You should know when earnings are going to be because a lot

of times there will be position squaring and things going on that

are out of the ordinary.

Q: Could you give an example of what kind of price action would

make you think something might happen? If you see buying ahead

of the earnings, does that suggest there could be positive news?

A: For example, if there are big buyers into the earnings and the

company reports better than expected, then it will usually gap up

and it’s a good place to get short. But if the stock is weak into the

earnings, then they beat the estimate. Then even if it gaps up, it’s

still good to get long after the earnings because there are still a

lot of people who were wrong. So a lot of is just watching. If I see

who the buyers were before and the news is good, then I see them

getting out of positions.

Q: So you could divine a lot of market-making strategy just by

watching the tape very carefully day in and day out—even with the

fact that everybody tries to hide their identity?

A: Yes, it changes all the time. But a high percentage of Nasdaq

volume is now composed of black box trading. So a lot of times

I will test price just to see where the market is. Let’s say I am

long and I start bidding up and bids come with me, then I know

I am good. Let’s say I offer and now no one joins me, no one is

an aggressive seller. That’s how I get information on the stock by

constantly bidding and offering.

Q: Let’s zero in on this. Would say that by doing this kind of

probative touch-and-feel action you, you are actually testing the

machines, not the human beings? By doing this you are actually

able to understand the programming behind those machines so

you can trade off of it?