Price of Oil

squating_bear · January 13, 2015, 12:39pm

[quote]Dr. Pangloss wrote:
So, what’s your edge?[/quote]
Thanks for all of this, I’ve got a lot to think about

My initial thought was that if I had an edge I would have been profitable. I’m much better at reading charts than I was a year ago, maybe that is an edge but I have not yet translated that to profits. I know there are a lot of people much better at chart reading than me, and there are also a lot of people that think chart patterns are bogus. Which is my competition? I personally think of myself as my only competition, which might be stupid

Buy and hold is not for me, I’m looking to be a good trader. I would not want to be long on a stock while its not running up. I’m not sure about professional trader tho - maybe someday. I still haven’t built my style yet but I am mostly thinking of a timeframe between 2 - 30 weeks for a trade. I know there are a lot of people that have speed on me, I do my stuff at night - I’m not even in the markets while they are open. My orders are tho - which I recognize to be dangerous. I trade with contingencies to help with that

This is why I’m thinking I should have more than technicals working for me on a trade. I may need a sharper edge by considering more slower (fundamental) data and also non-quantifiable information about specific stocks. Blending all of that into my decisions at night when the markets are still.

I’ve also been considering just having a big watchlist to go thru only on weekends. Picking out whatever catches my eye to do more research on, and if it looks good fundamentally etc. I can put those tickers onto a smaller watchlist to find an entry during the week. Then during the week I am only allowed to look at the smaller watchlist. So in that situation I would have a few edges, none sharp enough individually but the combination might be sharp enough. I have a lot to learn before I could do that tho. Nor am I sure it would work

[quote]So fast forward to the current day. Before anyone wanted to become a professional trader I would ask, “What is your edge?” That is, what do you know (or what tech do you have) that will allow you to carve out profit in the market? On the floor, the edge was geographic. I stood in front of brokers who represented all the largest banks. Up until the advent of the HFT firms, my edge was a combination of market experience and tech. In 2001, I was paying $2500/mo for a T1 line to connect to the exchange. In 2006, I dug up a couple city blocks to lay fiber directly to the building where the exchange housed it’s trading servers. That was closer to $5,000/mo. In 2008, I leased space in a rack adjacent to the exchange servers so I could run my trading strategies directly from the server. Being 1.5 miles away was no longer competitive; I needed to be less than 10 feet away. I don’t want to tell you how much that cost. [/quote]I have to ask how you can say fiber optics was to slow and you were not an HFT??? You wanted to be [i]the[/i] first guy to enter on a breakout or something?

Or you just didn’t want to tell me that actually you and your people are the ones getting me on the bid/ask spreads??

[quote]High frequency trading firms would run algos to hunt out institutional orders on electronic exchanges. [/quote] I didn’t understand what you mean by “hunting out”. Do you mean that they have algorithms to tell when (and how) institutions are trading? Like maybe watching intraday volume spikes (for a simplistic example)?

Then they try to widen the bid/ask spreads on the institutions?

squating_bear · January 13, 2015, 12:40pm

[quote]Dr. Pangloss wrote:
As you’re learning, fees, commissions, and the b/a spread will kill your returns. One of the major problems is that you’ll never be able to buy the bid or sell the offer. Most trading engines use one of two ways to apportion trades: FIFO or a weighted average. For FIFO if you’re the first bid on a price, you get the first trade at that price. The problem is HFT firms stack the book 50 prices deep precisely to game FIFO. So, you’re looking at an option on stock XYZ and you want to pay 23 and the current market is 23/25. There’s 500 contracts in front of you at 23 and 500 on the bid at 22 and 500 on the bid at 21 and so on. Additionally, the HFT firm has the ability to immediately cancel any and all orders if they start getting filled but don’t want them any longer.

So, when you’re finally able to buy your 23s, it’s because someone has dumped a ton at that price and the HFTs and other market makers have had their fill, or the price has gone offer. And now you’re looking at a market that’s 21/23. And if the underlying move is big enough, it might be 19/21. Now if you need to get out, you’re looking at a 4 point loser. [/quote]
Yeah I have noticed before that the way I had my orders set up, my order would never get filled unless the market moved against me. So even if my outlook was correct, I wouldn’t have been in the trade to make a profit on it. I’m thinking that from the way you described that, I would initially put in an order at 24, which usually gets filled, with a stop somewhere depending on my reasons for entry

I usually use stops instead of delta hedges. On a credit spread I sometimes go without a stop and tell myself I will buy back the short leg if it breaks up/down

[quote]are you hedging your delta? If not, why not. If so, are your delta hedges automated or are you trading them with discretion? [/quote]When I enter a trade I either do a “1st triggers OCO” with a stop built right in, or I draw a line on my chart to tell me where I need to either exit the trade or adjust it. My adjustment could be discretionary, but its usually just deciding whether to accept the loss by completely closing the position or buying back a short leg

If it was just a simple long call tho, I would just use a stop. You confused me a little. Why delta hedge a long call? I can understand delta hedging if you at least like your theta or vega, but why with a long call?

theuofh · January 13, 2015, 5:00pm

Dr. Pangloss,

What are your thoughts on HFT? I’ve heard a lot of sentiment from traders, both institutional and retail, that think it is a scourge on the earth.

Is it true that there an incentive for the exchanges to continue the practice, as they make a fee from every trade and the bots are responsible for the vast majority of trading?

Thanks.

LIFTICVSMAXIMVS · January 13, 2015, 5:15pm

[quote]theuofh wrote:
What are your thoughts on HFT? I’ve heard a lot of sentiment from traders, both institutional and retail, that think it is a scourge on the earth.

Is it true that there an incentive for the exchanges to continue the practice, as they make a fee from every trade and the bots are responsible for the vast majority of trading?
[/quote]

HFT actually make prices more stable in the long run because traders are able profit off of pennies per stock in very hi volume trades. For example, normal trader might need to see a stock price rise higher than someone trading on an auto-trading platform.

Many people don’t like it because they feel it is an unfair advantage “eating up all the profits”.

I’ve written some auto-trading scripts and it is not at all difficult with a good API. The hard part is finding a pricing algorithm that earns a decent profit.

I don’t think it’s unfair because there is still substantial risk like being exposed to a trade longer than one might want to be and one could still lose in the end. It was too much for my stomach so I pulled the plug.

Dr_Pangloss · January 13, 2015, 6:06pm

[quote]squating_bear wrote:
I have to ask how you can say fiber optics was to slow and you were not an HFT??? You wanted to be [i]the[/i] first guy to enter on a breakout or something?

Or you just didn’t want to tell me that actually you and your people are the ones getting me on the bid/ask spreads??

I didn’t understand what you mean by “hunting out”. Do you mean that they have algorithms to tell when (and how) institutions are trading? Like maybe watching intraday volume spikes (for a simplistic example)?

Then they try to widen the bid/ask spreads on the institutions?[/quote]

First, I like your idea of winnowing down the universe of stocks to a few that catch your interest, and that you know very well. If you have chart patterns that you like, follow those. I think the role of fundamental analysis in trading stocks is over-rated for anyone who doesn’t measure their holding period in years. There is no information you can get by reading a 10-K or a news story that hasn’t already been discounted by the market. That is what a market is, it’s a discounting mechanism.

To you next point, yes I want to be one of the first one’s to enter a breakout and yes people like me are hitting your bids and lifting your offers. However, I’m certainly not an HFT. HFT’s are typically market-making, that is they are on both sides of the market at all times. They use their low-latency connections [1] to make sure they’re at the front of the queue at all times, as well as able to cancel orders faster than other can hit them, if need be. While they increase the liquidity in a market, it’s “ghost” liquidity. They’re typically leaning on [2] other orders in that or similar markets.

Second, HFT’s use their immense computing power to look for commercial buyers and sellers in the market. An example: you’re a trader (actually execution broker) for Citibank and one of your customers wants to sell 100,000 of XYZ. You can sell it in one fell swoop and cause a huge price dislocation or you can start selling it piecemeal. Brokers used to handle this themselves, however now they typically use order entry algos to handle it. A simple also might be, “Every time the stock price downticks, sell 5,000 shares” or “Sell %10 of the position every 17 seconds”. You can see how these orders can be sniffed out and exploited by HFT firms.

HFTs also use their speed to arbitrage markets against one another or take advantage of news-based opportunities. Arbitrage isn’t used in the pure sense of the word here, but instead refers to statistical arb eg: exploiting predictable temporary deviations from stable statistical relationships among securities.

My own trading involved some market-making, a lot of stat-arb, and a lot of news-based opportunities. Market-making is very simple, if the market is 19/21 I’ll buy 19s or sell 21s. I want to be first on those prices so I get my orders filled first per FIFO. If I buy the 19s, I’ll offer 20s thereby tightening the market and improving my odds of a winning trade. If I see the 19s start to trade or cancel, I want to be able to sell them so I can 1)scratch my trade, or 2)jump on a market that’s going lower.

I’ll tell you a bit about my news-based trading. My trading software ($2,000/mo) has the ability to import orders from Excel. And Excel has the ability to import information from Bloomberg ($2,000/mo). Let’s say it’s the first Friday of the month and unemployment will be released at 7:30 CST. SPY (an ETF that tracks the S&P500) is trading $202/$203. I think to myself, if unemployment comes in below %6.2, I want to get long up to 1000 shares of SPY and I’ll pay up to $205. If unemployment comes in above %7, I want to get short 2000 shares of SPY and I’ll sell it as low as $195.

I’ve programmed these two if/then statements into Excel and I will also import the unemployment rate into a cell from Bloomie. So, unemployment comes out at %7.1, very bearish. That number is sent from Bloomie to my spreadsheet, where it is acted upon by my if/then statements, and they an appropriate order is sent from my workstation to the exchange servers. You can see that while I’m not an HFT firm, I do rely on fast, robust connections.

I’ll save stat arb for another post as it’s been my bread and butter trade for nearly my entire career in one form or the other.

Dr_Pangloss · January 13, 2015, 6:07pm

Footnote for above post:

1 Per Wiki: Another aspect of low latency strategy has been the switch from fiber optic to microwave technology for long distance networking. Especially since 2011, there has been a trend to use microwaves to transmit data across key connections such as the one between New York and Chicago. This is because microwaves traveling in air suffer a less than 1% speed reduction compared to light traveling in a vacuum, whereas with conventional fiber optics light travels over 30% slower

2 “leaning on” refers to the practice of taking a position in the market solely because there’s an order there that you can scratch against if need be. For example, you’re trading stock XYZ and bidding $100 on 1000 shares. At the same price, others are bidding for another 5000 shares. If I’m at the front of the queue and my order gets filled, I can offer $101. If i see the 5000 shares start to trade or cancel, I can sell my 1000 lot back at $100 and scratch the trade.

uofh - An excellent book on the topic is Flash Boys by Michael Lewis. It’s written for the layman so some things are over-simplified, but he gets a lot right. HFTs provide liquidity to the market so in that sense they’re good. They do, by design, make life difficult for institutional traders. So, it really depends on who you’re talking to. In the futures markets, HFTs account for %60 of the volume. In the equity markets, they account for nearly %70 of the volume, so they are the golden goose from the exchange’s perspective.

LIFTICVS - I believe that during periods of stability, HFTs make the markets more stable by adding liquidity. However, during periods of instability they further destabilize the markets because their hedges ultimately get taken away, see: flash crash. What do I mean by that last sentence: During periods of heavy selling, they may wind up with a much larger position than they ever intended to have and they themselves will have to turn seller adding to the overall pressure.

The best HFTs don’t lose money. At all. No losing days. They do not trade to take risk, they trade to print dollars.

Dr_Pangloss · January 13, 2015, 5:52pm

[quote]squating_bear wrote:
If it was just a simple long call tho, I would just use a stop. You confused me a little. Why delta hedge a long call? I can understand delta hedging if you at least like your theta or vega, but why with a long call?[/quote]

I don’t trade options to take advantage of directional moves in the market, I’ll trade the underlying if that’s the exposure that I want. I trade options as a vehicle to trade volatility. In fact, that’s how I price my option sheets, based on vol.

If I think a stock is going up, why would I want to buy the calls and fight the decay? Buying the underlying is a better strategy 8/10 times. It’s also cheaper.

When I trade options, I’m trying to buy vol cheap and sell it dear and in order to do so, everything gets hedged.

LIFTICVSMAXIMVS · January 13, 2015, 6:44pm

[quote]Dr. Pangloss wrote:
LIFTICVS - I believe that during periods of stability, HFTs make the markets more stable by adding liquidity. However, during periods of instability they further destabilize the markets because their hedges ultimately get taken away, see: flash crash. What do I mean by that last sentence: During periods of heavy selling, they may wind up with a much larger position than they ever intended to have and they themselves will have to turn seller adding to the overall pressure.

The best HFTs don’t lose money. At all. No losing days. They do not trade to take risk, they trade to print dollars.
[/quote]

Thanks for all the info. I guess I was just contrasting auto-trading with HFT. What I was doing was not “high frequency”. There were weeks straight where I was stuck holding waiting for the right price movement - plus I was was working with a much smaller pool of money.

Dr_Pangloss · January 13, 2015, 6:52pm

[quote]LIFTICVSMAXIMVS wrote:
Thanks for all the info. I guess I was just contrasting auto-trading with HFT. What I was doing was not “high frequency”. There were weeks straight where I was stuck holding waiting for the right price movement - plus I was was working with a much smaller pool of money.[/quote]

Exactly, I’m not an HFT either, but I have automated much of my order entry and execution responsibilities. It’s great, because now I can run strategies in multiple markets.

theuofh · January 13, 2015, 9:04pm

[quote]Dr. Pangloss wrote:

An excellent book on the topic is Flash Boys by Michael Lewis. It’s written for the layman so some things are over-simplified, but he gets a lot right. HFTs provide liquidity to the market so in that sense they’re good. They do, by design, make life difficult for institutional traders. So, it really depends on who you’re talking to. In the futures markets, HFTs account for %60 of the volume. In the equity markets, they account for nearly %70 of the volume, so they are the golden goose from the exchange’s perspective.

[/quote]

Here’s a nice little case study if anybody else is interested: Nanex ~ 15-Jul-2014 ~ Perfect Pilfering

Dr_Pangloss · January 13, 2015, 9:23pm

Nanex has done some tremendous work to expose the HFTs.

Unfortunately, the splintered nature of equity markets allow this type of arbitrage to continue. You don’t see these same abuses (but there are others) in the exchange-listed derivative markets.

http://www.forbes.com/sites/kitconews/2014/02/06/nanexs-hunsader-seeks-to-save-markets-from-high-frequency-trading/2/

Dr_Pangloss · January 14, 2015, 8:04pm

Brace for $40-a-barrel oil.

The U.S. benchmark crude price, down more than $60 since June to below $45 yesterday, is on the way to this next threshold, said Societe Generale SA and Bank of America Corp. And Goldman Sachs Group Inc. says that West Texas Intermediate needs to remain near $40 during the first half to deter investment in new supplies that would add to the glut.

?The markets are continuing to price in huge oversupply in the first half of 2015,? Mike Wittner, head of research at Societe Generale SA in New York, said by phone on Jan. 12. ?We?re going to go below $40.?

Oil is seeking a ?new equilibrium? as the Organization of Petroleum Exporting Countries abandons its role of keeping supply and demand aligned, according to Goldman. Prices are poised to drop further, testing the ability of U.S. shale drillers to keep pumping.

Oil Prices

WTI fell as low as $44.20 a barrel on the New York Mercantile Exchange yesterday and traded at $46.05 at 1:39 p.m. local time. The U.S. benchmark has dropped 14 percent this month, extending a 46 percent plunge last year that was the worst since the 2008 financial crisis.
OPEC Strategy

OPEC is trying to maintain its share of the global oil market against the rise of U.S. output. United Arab Emirates Energy Minister Suhail Al Mazrouei reiterated yesterday that shale producers will capitulate before OPEC to lower prices, the latest in more than a dozen comments from Gulf members aimed at hastening oil?s slide and lowering non-OPEC supply. The group upheld its target of 30 million barrels a day at a meeting in Vienna on Nov. 27.

The rout may continue to $35 a barrel in the ?near term? because both oil supply and demand will have a delayed reaction to falling prices, Francisco Blanch, head of commodities research at Bank of America in New York, said in a report on Jan. 6.

The U.S. is pumping oil at the fastest pace in more than three decades, helped by a drilling boom that?s unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota. U.S. output expanded to 9.14 million barrels a day in the week ended Dec. 12, the most since at least 1983, according to the U.S. Energy Information Administration.
Reducing Investment

With Saudi Arabia and other OPEC nations no longer fine-tuning supply, reductions in investment in new production will be the instrument for removing excess output, Jeffrey Currie, head of commodities research in New York at Goldman said in a report on Jan. 11. This means the collapse will be deeper and the recovery slower than in previous slumps, he said.

Operating cash costs for many non-OPEC projects are below $40 a barrel and some producers will be able to keep going because they have locked in forward prices, or are supported by tax breaks or weaker domestic currencies, said Blanch, who on Nov. 27 predicted that WTI, then above $70 a barrel, could plunge to $50. An increase in demand in response to lower prices will take about six months, he said.

?An impatient oil market, wanting to see production adjustments as soon as possible, could push WTI oil prices to $40 a barrel,? Giovanni Staunovo, an analyst at UBS AG in Zurich, said by e-mail yesterday. Investment ?cutbacks and less drilling activity are required to see a stall in North American supply growth. This is unlikely to happen in a meaningful way before the second half,? he said.
Cutting Supply

While U.S. drilling activity has slowed down in response to the price plunge, it will take months for that to translate into lower supplies, according to Societe Generale?s Wittner. Rigs seeking oil in the U.S. decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9. That?s the largest drop since February 1991.

?Rig counts are coming down, so it is happening the way it?s supposed to happen,? Wittner said. ?But it?s going to take a while to see an impact on shale oil.?

A seasonal lull in demand this quarter will add to the downward pressure from brimming inventories, pushing down prices as much as another $10 a barrel, Amrita Sen, chief analyst at London-based consultant Energy Aspects Ltd. said in an interview on Bloomberg Radio?s ?Surveillance? on Jan. 12.

?There is likely to be another leg lower for prices,? said Sen. ?I wouldn?t rule out a peek into the $30s.?

Dr_Pangloss · January 15, 2015, 5:15pm

FRANCOGEDDON!!!

Biggest currency move I’ve seen in 20 years. The Swiss Central Bank unpegs it’s currency from the Euro.

http://www.reuters.com/article/2015/01/15/us-swiss-snb-cap-idUSKBN0KO0XK20150115

I haven’t heard any concrete horror stories yet, but one of my closest friends bought 30 Swiss on the close yesterday. If he held them overnight, depending on where he got out, he’s looking at a $650k - $800k winner.

Not bad for a day’s work.

NorCal916 · January 15, 2015, 5:20pm

How low do you see oil going Doc?

Where’s the floor??

Dr_Pangloss · January 15, 2015, 6:48pm

[quote]NorCal916 wrote:
How low do you see oil going Doc?

Where’s the floor??[/quote]

There are 2 components to price: supply and demand. On the supply side, the Saudis have made it clear that, as the low-cost producer, they want to make existing US shale and tar sands production unprofitable. Although the marginal cost (the cost to pull the next bbl of oil out of the ground) is around $40, exploration companies really want to see sustained periods with WTI over $60 before they commit to new exploration and expanding current projects.

On the demand side, if world demand slows we could go lower. If global - especially Asian - demand increases crude will go higher.

So, all else being equal, I think we’re near the bottom and will bounce around between $40 and $55/bbl for the first half of this year. Any lower than $40 and the Saudis are giving up too much in price per bbl. Any higher than $55 and US production starts to ramp up.

BPCorso · January 15, 2015, 9:21pm

[quote]jjackkrash wrote:

[quote]BPCorso wrote:

[quote]jjackkrash wrote:

[quote]BPCorso wrote:
I agree with most of your post, though. I do want to point out that from what I’ve seen wholesale diesel prices at both the rack and trading hubs have been dropping a lot. I’m too lazy to compare percentages with retail gasoline but there’s been a marked decrease in diesel prices across the country. BUT retail diesel has not dropped much (although it has) relative to retail gas and wholesale diesel. But retail diesel prices aren’t all that important compared to wholesale diesel.[/quote]

It used to be for every gallon of gas they refined it threw off a gallon a diesel as a waste product. But now I suspect to get the low sulfer/clean diesel the refining process is different and more complicated than gas. I haven’t really looked into this though, but I know that shit sure doesn’t like to budge even when gas moves sharply and my truck takes 35 gallons every time I go fill up.
[/quote]

Yea man, I only have a shallow understanding of petroleum products and really don’t have an idea why there’s such a disparity between price decreases for retail and wholesale diesel (note, I’m comparing ultra low sulfur to ultra low sulfur so apples to apples).

BTW, I wasn’t trying to be an ass by saying retail diesel prices isn’t that important compared to wholesale diesel. That was in response to a comment about how diesel is important to lots of sectors in our economy (mining equipment, farm equipment, etc). That diesel is purchased wholesale and in much greater quantities than retail diesel. Obviously doesn’t help people like you who use diesel for their personal vehicles and don’t have access to rack pricing. [/quote]

No offense taken. I choose to drive my truck for my daily because I love the ride and having access to 800 ft. lbs. of torque and I can afford the fuel costs. It still hacks me off a bit though how expensive diesel is when it should be cheaper than gas.

As an aside, my buddy has the exact same truck and cut out the diesel-fluid-exahust system, went to straight pipe, and chipped it. He literally gets 4 to 5 mpg better than me in comparable driving conditions, i.e., unloaded or loaded on the same road. I know because our families camp and road trip together. It doesn’t make sense to me that 10mpg loaded is more environmentally friendly than 15 mpg loaded, even if my system on paper looks “cleaner” because it throws out less particulate matter per gallon.
[/quote]

Hey man, so a couple days ago a very popular energy blog (RBN Energy) posted a piece on this exact same issue. Why diesel prices have not been dropping in step with gasoline, and why retail diesel prices in particular have been been relatively stagnant. It makes sense that diesel should come at a premium to gasoline, but what’s the rationale for it not decreasing in price at a similar rate?

Ultimately, there’s no way to answer it right now. The blog piece is basically a data review and something I figured out myself b/c I had to look at rack and retail diesel prices a week ago the same time you made a comment about high diesel prices. It concludes with saying it might just be refiners and marketers not giving a shit and not passing on the cost savings from lower wholesale prices to retail motorists such as yourself. A raw deal for sure.

That blog should be good until next Tuesday. After a week I think they cut off access to their archives unless you subscribe. If you need I can post the article here but didn’t want to make a super long post if not necessary.

jjackkrash · January 15, 2015, 9:37pm