A recent investigation by traders Sal Arnuk and Joseph Saluzzi of Themis Trading reveals that up to 70% of volume in US equity markets is currently being generated by what are known to Wall Street insiders as “high frequency traders” (HFTs).

What are HFTs and why you should be concerned about their dominance in the markets right now will be the subject of today’s Notes. We’d put it to you this way. HFTs are like the robot Arnold Schwarzenegger plays in the Terminator movies. They’re built for one purpose only: to annihilate anything that stands in their way. And right now, that means you.

First, what are HFTs? Here’s how Arnuk and Saluzzi define HFTs in their excellent white paper “Why Institutional Investors Should be Concerned About High Frequency Traders” :

HFTs are computerized trading programs that make money two ways, in general. They offer bids in such a way so as to make tiny amounts of money from per share liquidity rebates provided by the exchanges. Or they make tiny per share long or short profits. While this might sound like small change, HFTs collectively execute billions of shares a day, making it an extremely profitable business.

Second, why should you care? Again, we turn here to the wise words of Themis’s Arnuk and Saluzzi:

1. Volume has exploded, particularly in NYSE stocks. But you can’t look at NYSE volume on the NYSE. The NYSE only executes 25% of the volume in NYSE stocks. You’ve got to look at NYSE listed shares across all market centers, such as ECNs, like the NYSE’s own ARCA, or dark pools, like LiquidNet. Traders Magazine estimates high frequency traders may account for more than half the volume on all U.S. market centers.

2. The number of quote changes has exploded. The reason is high frequency traders searching for hidden liquidity. Some estimates are that these traders enter anywhere from several hundred to one million orders for every 100 trades they actually execute. This has significantly raised the bar for all firms on Wall Street to invest in the computers, storage and routing to handle all the message traffic.

3. NYSE specialists no longer provide price stability. With the advent NYSE Hybrid, specialist market share has dropped from 80% to 25%. With specialists out of the way, the floodgates have been opened to high frequency traders who find it easier to make money with more liquid listed shares.

4. Volatility has skyrocketed. The markets’ average daily price swing year to date is about 4% versus 1% last year. According to recent findings by Goldman Sachs, spreads on S&P 500 stocks have doubled in October 2008 as compared to earlier in the year. Spreads in Russell 2000 stocks have tripled and quoted depth has been cut in half.

5. High frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.

We fully realize that these concepts are difficult to grasp. And many of you may be sorely tempted to shut down this email and move on to something easier to digest. That’s fine. We make no apologies for tackling complex issues here at Notes that you won’t find discussed in the mainstream financial press.

But readers who stick with us will begin to grasp what not one investor in a thousand understands: that the stock market is not made up of humans but of highly sophisticated machines and that every time you buy or sell a stock you are going up against these machines. Worse: this new generation of highly profitable, high-speed computerized trading methods are causing investors to chase artificial prices.

That’s because many of these HFTs are predatory. That is they are designed to trigger other HFTs to pile into a trade and thus lock in artificially high (or low) prices This, again, from Saluzzi and Arnuk:

More than half of all institutional algo orders are “pegged” to the National Best Bid or Offer (NBBO). The problem is, if one trader jumps ahead of another in price, it can cause a second trader to go along side of the first one. Very quickly, every algo trading order in a given stock is following each other up or down (or down and up), creating huge, whip like price movements on relatively little volume.

This has led to the development of predatory algo trading strategies. These strategies are designed to cause institutional algo orders to buy or sell shares at prices higher or lower than where the stock had been trading, creating a situation where the predatory algo can lock in a profit from the artificial increase or decrease in the price.

So where does this leave you as an individual player in the market? Unfortunately, there is very little individual players can do for now, other than be aware of the situation. Understanding the rules of the game is critical to your success as an investor. And right now, the rules are changing rapidly.

We have fired off an email about this critical issue to Simon Mellon of Bonner & Partners Family Office, veteran crisis investor James Dale Davidson and quant expert Charles Delvalle (who heads up Payout Trader, an investment service with a ridiculous 100% success rate so far). We know these guys personally. They’re some of the smartest guys in the market. Hopefully, they will have advice for Notes readers on how to deal with the growing HFT threat. Watch this space…

This from Taipan Daily:

Wayne Gretzky is widely regarded as the greatest ice hockey player of all time.

At first glance this is an odd thing. When you think of hockey players, you normally picture big, burly, broken-nosed guys with hulking frames and lighting-fast reflexes. (Or at least that’s what I picture. But then I’m not Canadian, eh.)

Gretzky, in contrast, was never all that big. At six feet and 185 pounds, he comes up an inch shorter than your humble editor (who also happens to weigh 185).

That’s not a lot of bulk to throw around the ice. So maybe he was super-fast to make up for it? Nope. Gretzky was never all that fast either.

And yet, this average-built Joe was so far ahead of his peers on the ice, they nicknamed him “The Great One” – and not in sarcasm either. Gretzky earned that nickname.

When he retired in 1999, Gretzky held forty regular season records, fifteen playoff records, and half a dozen All-Star records. He also enjoyed the distinction of being the only NHL player to score more than 200 points in a season. And as if one 200-point season weren’t enough, he did it four times.

Gretzky’s Secret

So what was Gretzky’s secret? How did he do it?

It was brains, not brawn. In trying to explain it, observers talk about The Great One’s “puck intelligence” and ability to “read the game.”

Gretzky was so skilled at processing the real-time subtleties of the rink, in other words, that this one area of dominance enabled him to leave all his stronger, faster opponents in the dust.

When asked to explain his edge, Gretzky put it like this: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

Which brings us round to today’s topic. Great traders do the same thing in markets that Gretzky did in the hockey rink. They anticipate where the puck (or rather the market) is going to be.

Pockets of Clarity

A lot of people think trying to predict the markets is a mug’s game. They think it’s pretty much impossible to know what’s going to happen next month or next year or what have you.

And you know what? For the most part, I agree with them. When someone tells me they know exactly what’s going to happen way down the road because of chart pattern ABC or market cycle XYZ, I usually just smile.

Nobody knows for certain what’s going to happen. There are just way too many variables, many of them self-reflexive and changing in real time.

Humans aren’t smart enough to predict the turbulence in a glass of water, let alone the ebb and flow of global financial markets.

But this doesn’t mean prediction is impossible 100% of the time. It only makes it impossible, say, 90-95% of the time.

That last 5 to 10% makes a huge, huge difference! (Sort of like saying the market is “totally efficient” versus “mostly efficient.” There is a grand-canyon-sized gap between the two.)

Think of the markets as shrouded in fog (the fog of war, perhaps). Most of the time things are hazy. You’re watching, testing, getting a bead on things… then every once in a while the fog opens up. For just a brief window of time, in regards to a specific scenario or a specific opportunity, you see what is bound to happen. Everything clicks into place, and you know exactly what to do.

I call these little moments “pockets of clarity.” Most of the time, you just watch and wait and observe. But when you get one of these pockets of clarity, that’s when action is called for.

The same principle works in a hockey rink, or on a basketball court. (If you’re an NBA fan, just imagine Larry Bird, whose limitations and gifts were a lot like Gretzky’s.)

When a player like Gretzky is on the ice, he doesn’t always know where the puck is going to be, any more than a great trader always knows what the market is going to do. That would be impossible.

Instead, a Gretzky-caliber player spends most of his time hustling, observing, positioning… so that when that clarity pocket opens up – when that brief window of opportunity reveals itself – that’s when swift action is taken.

Sell Every Stock You Own and Buy This Asset Today!

While current market conditions are treacherous for naive “buy and hold” investors, a small group of smart folks are converting the market slide into gains of 251%… 307%… even 387%… without touching a single stock! Read on now to get in on their next triple-digit winner…

Hustle Required

Here is another Gretzky quote that translates perfectly to the trading world: “The highest compliment that you can pay me is to say that I work hard every day, that I never dog it.”

It’s hard work figuring out where the puck is going to be. It takes countless hours of thought and dedication and practice. It takes real commitment, day in and day out.

In practice, this means different things for different traders. But the common element is that all great traders hustle.

Some (like me) spend a lot of time developing big picture market scenarios… getting a feel for how the major elements could play out… adjusting the top-down view for real-time events. Others (like my friend Zach, aka Cash McDash) take a more bottom-up approach, digging deep into the stories and profiles of individual companies and industries. But the basic process, the hustle, is the same.

And by the way, sharp long-term investors do this too.

A good value investor still hustles and anticipates the puck – just typically more from a balance-sheet perspective, and without worrying so much (or worrying at all) about timing.

If you find an undervalued company with a lot of good things going for it – strong balance sheet, smart management, loads of cash in the bank, quality assets on the books and so on – you can reasonably expect that, with enough patience, something good will happen to the share price at some point in the future.

The key thing, again, is working hard and thinking about where the puck is going to be – specific ways in which the future is likely to shift relative to the present moment.

What most investors and traders do — buying something because the PE ratio looks okay, hopping on a stock because some talking head on CNBC recommended it – is nowhere near the same thing.

Taking Shots

Gretzky said something else that is especially useful for traders: “You miss 100% of the shots you don’t take.”

In practice, this means you don’t have to be right every time. As long as you have good risk management principles in place, it’s okay to be wrong. In fact, great traders often expect to be wrong a fair percentage of the time.

To understand why, let’s go back to the hockey rink again. Imagine if Gretzky only took shots when he was absolutely 100% sure he wouldn’t miss. Would he ever have had a single 200-point season, let alone four of them? No way. Fear of failure would have led to paralysis, or at least cut way, way down on the total number of shots scored.

Great traders know that as long as the risk management is in place, it makes sense to take calculated risks.

You can prove this yourself with a simple math experiment. Imagine you had the chance to bet heads or tails on a fair coin toss – tails you lose $1, but heads you win $2. How many tosses would you sign up for?

I would take an infinite number of tosses at those odds (if anyone were fool enough to give them to me). Even losing half of the time, you come out way ahead… and the more you toss, the further ahead you get.

It’s easy to see this with a piece of scratch paper. Just tally up the wins and losses. After 10 tosses (assuming an equal split of heads and tails), you would be $5 in the black. After 100 tosses, $50 in the black. After 10,000 tosses, $5,000 in the black, and so on.

Keep in mind, too, that a good trading rule of thumb is to look for at least 3-to-1 upside on your trades (rather than just 2-to-1).

That is to say, don’t take a trade unless you think you have a fair and reasonable chance of making triple the amount you’re putting at risk. So if you have, say, $500 in planned risk on a position – the amount you stand to lose if stopped out – you want to have a realistic shot at $1,500 in net profits on the trade.

In fact, with 3-to-1 sizing guidelines and consistent risk management, you could actually be wrong 60% of the time… only getting it right 4 times out of 10… and still make a strong profit!

You can see this again with the math. Imagine a series of ten trades where you win four times (40%) and lose six times (60%). At 3-to-1 reward to risk, you come out six units ahead: (4 x 3 = 12 units of gain) – (6 x 1 = 6 units of loss).

Play Ball

To borrow from one last sport, just think of batting averages in baseball. Ted Williams was a hero for batting .400, which meant one of the best that’s ever played the game failed to connect 60% of the time. (And any multi-millionaire baseball player alive would give his eyeteeth to bat .400 today.)

You don’t ever want to be wrong intentionally, of course. But the best trading opportunities are often the slightly unnerving ones – like the blazing fast-ball screaming in at 90 miles per hour. Will it drop low and left or come right across the plate? If you’re in the game, you can’t be afraid to swing when the timing feels right.

Source: To Be a Great Trader, Think Like Wayne Gretzky

We now believe Asia’s markets are poised for a rebound and this could be your last chance in the foreseeable future to get in on the ground floor.

Right now I’m scoping two stocks that could be about to cut the mustard!

They’re not buys yet… but one of them could be any day now.

The best move you can make

We’ve been sitting tight on our positions since the beginning of the year instead of charging back in at the first sign of an apparent rebound.

It was the right move.

Most of them proved to be dead cat bounces, and the irrational optimists who got in too early have gotten burnt.

The average Asian hedge fund has seen a loss of 5.6% since the beginning of the year… and that’s with the advantage of every possible trading strategy available to them!

The sharp falls we saw in most Asian markets went beyond what can be economically justified. A lot of it was driven by hedge funds being forced to liquidate portions of their portfolio. Investors panicked and began withdrawing money from the funds… banks and brokerages hit by the credit crisis refused to lend to them.

So hedge funds were forced to sell shares to meet margin calls or to reduce their exposure.

In fact, the amount of money invested in Asia-focussed hedge funds fell by 10% in the first three months of this year…

But the investment case for Asia remains intact.

What I’m waiting for is a change in sentiment and the evidence for that is growing. And it’s growing fast!

You see, what worked on the downside should work on the upside too. The re-entry of the hedge funds could give the region a boost.

Here’s one move you can make before they do!

So, if you’re willing to ride-out the short-term turbulence, this is a good time to get into Asia.

Vietnam remains my favourite market in Asia — in fact my favourite way to play this phenomenal trend is listed right here in the UK. You can access all the details here.

But right now, markets everywhere are having a rough time. Asia and Europe have been falling for the last three days. They’re jittery over the surging price of oil. It hit a new record of $135 this morning. We can almost see OPEC President Chakib Khelil, smiling smugly… he’s predicting $200 oil.

Auto makers and transport companies have been having the worst of it. The airlines are ripping their hair out.

In Asia, we’ve seen the price of jet fuel shoot up by more than 50% since the beginning of the year!

Why we like the higher oil price

Shipping companies have taken a hit as well.

Investors are worried that higher fuel prices may dent profits.

We aren’t complaining though. We’re bullish on Asian shipping companies because the credit crunch has led to a slowdown in the number of new ships being built.

That’s obviously good news for the existing shipping companies and we’ve been running the rule over several of them.

But top shipping companies saw their share prices jump after that report on falling ship orders hit the mainstream financial press. So, we’re excited that the latest jitters over the oil price could bring their share prices back down to levels that we find exciting.

We’ve now whittled that down to two fantastic companies.

But we would like to see further falls in their share prices so that the potential impact of rising fuel costs is fully priced in. They’re both fantastic companies, but only one is going to make the cut.

In the meantime, check out our Vietnam opportunity right here and be ready when I give the signal to buy one of these incredible shipping stocks.

Regards,

Manraaj Singh
Editor Profit Hunter

Source: Asia’s Markets Bottomed Out!

Louise Woof’s new Foolproof Earlybird Trading Strategy has made spread betting the financial markets for profit a whole lot easier – and you can start with as little as £100 in your betting bank.

You’ll find full details here

You may have heard of Louise Woof before. Last year she published the hugely popular Foolproof Forex strategy.

But there was one drawback…

If you’re anything like me, you probably don’t have the time or patience to be glued to a computer screen all day to catch every trade or news announcement.

And so Louise made it her mission to figure out an approach that allows anyone to trade successfully in as little as 10 minutes in the morning. (Of course, if you can spare more time then you could catch even more trades!).

Does it work? Well, just check out some of the testimonials from very happy traders following her system:

** “Wow, I have just made £600 in 10 minutes!” Greg.

** “[I] have turned £200 into over £5000 in my first 2 days of trading.” Mike L.

** “In the 4 weeks since start up I have made just over £7,000″ Ron.

** “This week I have made £1,025!” Liz.

** “£200 while making a cup of tea!” Anthony A.

** “Thanks for a brilliant product, have just made £46.80 profit from a £1 stake.” Charlotte R.

** “Just made 23.6 pips profit in 14 minutes. I’m over the moon.” Bob D.

** “£530 profit in the first 2 days for 15 minutes of “work”. S.M.

Genuine testimonials and full details of the strategy here

You see, the key to this type of betting is LEVERAGE – giving your money the power to create far more potential profit than conventional methods.

Using spread trading allows you to really profit when you’re right, and when you’re wrong, well, nip it in the bud quickly with a predetermined stop loss.

What’s more you can open a dummy account and paper trade until you feel comfortable.

What I love about Louise’s approach is it strips trading to the basics without limiting the profit potential. So it is the perfect plan for both newbie and more seasoned trader.

Click here to find out more

How does it work?

What we have here is a kind of momentum trading. You’ve probably heard that ‘the trend is your friend’, well that’s what you’re doing here – waiting for the market to confirm an up or down move and you then simply piggyback the move for small but regular gains.

It really is simple to learn and follow. There’s no need to track moving averages or draw fancy lines on charts. No need for 52-day highs and lows – just sit there, read a chart, place a bet if the signal appears, or just walk away.

Starting at around 8am on a weekday, you watch a very simple chart – check to see if it meets a couple of simple criteria. If confirmed, you bet. If it not – no sweat – you simply walk away and wait for the next opportunity.

Check out the full background to the strategy here

And there’s more good news…

After some hard bargaining, I’ve persuaded Louise to discount the regular price of Earlybird by £50 – but ONLY for a limited time. If you’re quick, instead of paying the full £347, you can get your hands on her new strategy for just £297!

What’s more you are covered by a full unconditional 30-day money back guarantee (underwritten by us), so you can try it out to see if it is for you. More details here

“Come on, what about the risks?”

Let me be totally upfront with you here. This is financial speculation and just like betting involves risks.

Therefore you should never trade with money you can’t afford to lose.

Even though the strategy historically has an 80% strike rate, around 1 in 5 trades will lose. However, the beauty of Louise’s strategy is that every trade has a strict stop loss that means you cannot lose more than 15 points on any trade (that’s the equivalent of £15 on a £1 per point stake).

My initial tests with Earlybird have been totally positive, but as Louise says in her chapter on the mentality of trading (very similar to betting – tame that greed monster!) you’ve got to know the system inside out before you wade in and then, you must follow the simple rules to the letter.

It’s good to see that the system had a number of beta testers before its general release – this strengthens my confidence that you don’t need previous trading experience.

And remember, your gains can be compounded for extra power, but even with level stakes and as little as £100 in your starting bank you could be in profit with the very first trade!

So take a look here now and get trading!

You have a full 30 days risk free trial period where you can put the strategy through its paces – more than enough time to see if this simple yet potentially profitable strategy is right for you.

Enjoy!

Regards,

Rob Mackrill
The Daily Reckoning

PS: Remember, you can get your hands on Foolproof Earlybird at a special discount, but please hurry – I can’t guarantee it will stay that way for long!

Click through to read further

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Foolproof Early Bird is an unregulated product. Information in Early Bird is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Please note Foolproof Earlybird is designed for educational purposes only and does not represent buy or sell signals. Spread betting is a leveraged product that can result in losses that exceed your initial deposit. This form of investing may not be suitable for all investors so ensure you fully understand the risks involved and seek independent advice if necessary. Appropriate independent advice should be obtained before making any such decision. Foolproof Early Bird is published by Louise Woof, Money Earners plus and co-published by Canonbury Publishing ltd – Registered Offices: Unit 1, Hainult Works, Hainult Road Little Heath, Romford RM6 5SS.