Tagged: price

Livermore Lesson

A guy from Cumbria in the UK has built a Twitter Tape Machine.

Programmer Adam Vaughan was long intrigued by ticker tape, the stock market technology standard from 1869, when Thomas Edison patented a version better than inventor Edward Calahan’s, until the 1960s when TV and computers made paper tape spitting out price and volume for stocks obsolete.

Mr. Vaughan built his device from spare parts and networked it to check his Twitter feed every thirty seconds and burn anything new onto a strip of thermal cash-register paper. No ink. No checking the device. Tear off the strip and read.

It’s a goofy idea. Isn’t it better to scroll a phone screen with your index finger?  But you can order the Twitter Tape Machine if you’re moved.

Sometimes we need absurdity to shine brightly before we see things.  Nobody reads ticker tape anymore. And yet. Price and volume scrolling on screens is still the standard.

Jesse Livermore started trading stocks in 1891 after working as a board boy transferring figures from ticker tape to the quotation board at Paine Webber. In his tumultuous life speculating in stocks, he famously made $100 million shorting the 1929 crash – the equivalent today, using an income measure of worth, of about $7 billion.

He’d be the John Paulson, the George Soros, of then. Before the riches, on May 9, 1901 Livermore lost $50,000. He later said, “The ticker beat me by lagging so far behind the market. The divergence between the printed and the actual prices undid me.”

A hundred years ago the top high-frequency trader of his time saw opportunity in the gap between posted and actual prices. Today we call that “latency arbitrage,” one form of profiting on price-differences by spotting lagging price patterns. You need machines in the National Market System to win the gap trade, and firms like Tower Research and Hudson River Trading have made it an automated science.

Livermore made and lost fortunes, going bankrupt three times, living large and then committing suicide in 1940, saying in a note his life was a failure. Ticker tape won in the end.

But Livermore was an outlier. Most of the prices and volume on the tape then came from committed investment.  It’s to me fantastically ironic that the SEC was formed in the 1930s to mitigate nefarious “bucket shop” short-term manipulation – and now under a heavy regulatory regime half the market’s volume is a form of exploitation via short-term price-moves. Every one of those costs you minutely, investors and companies.

Leveraged ETFs, investment funds sanctioned by the SEC that use derivatives to deliver one-day directional bets, are arbitrage. Speed traders exploiting slow and fast prices, intraday volatility, divergences from the mean tracked by passive investments, are arbitraging, profiting on price-differences.

Where Livermore was on the cutting edge in 1929 shorting stocks, today 45% of ALL daily market volume is short – from borrowed shares.  Routinely now we see shorting running up as prices rise and down as prices fall. Traders make money via a sort of above-the-surface, below-the-surface trade that works best in a placid VIX environment.

If speculators exploit the tape – price and volume – why do price and volume remain the convention for measuring what investors think? In a market riven with arbitrage?

On every investor-relations website are displayed price and volume. Ticker tape. As if that connotes fair value when we know so much volume, the relentlessly changing prices (our clients average 14,000 trades daily – 14,000 theoretical different prices!), reflect arbitrage.

It’s absurd if you think about it. In 1901 Jesse Livermore could exploit patterns in the tape, and the tape showed price and volume. In 2017, price and volume remain the key data points public companies use to measure the market. But exploitation has exploded.

Investors and public companies alike should be going BEHIND price and volume to the patterns, trends, drivers. Price and volume are consequences. Patterns are the future for well-informed constituents. I suspect even Jesse Livermore would agree.

Our new Key Metrics Report released yesterday for clients puts the focus not on price and volume but six metrics stacked by period, so one can see when the Livermores are leading, or Active investors committed to story.  Instead of searching the tape, scroll to see patterns in Rational Price, Engagement, Short Volume, Key Behavior, Sentiment.

Best, patterns signal what’s coming. There are patterns in weather, patterns in stocks, because mathematical principles govern both. And all things in this universe.

I imagine a day when on websites everywhere are Rational Prices instead of just market price and volume.  And more. But one step at a time!  First, learn your patterns. It’s the future. Price and volume are prologue, like the past.