Wednesday, February 01, 2006
Informational Edges
Forgot about this blog over the half dozen months, but will go back to the occasional post or two after coming back and realizing I'm still getting hits.
When it comes to pricing a security, information is king. SAC Capital, run by Steve Cohen, one of the largest and most successful hedge funds, I remember publicly stating in some article that their primary edge was getting information before others. I think I remember them writing how they would constantly hound all of their contacts in the equities industry, every analyst, every banker, making sure that when big news is breaking they're the first to get the call.
There are almost countless ways to define an informational edge, as well as to take advantage of one. I'll bring a simple one (that may be gone soon, as a result of new reg SHO rules and ARCA/NYSE merger). One trade that I still like to do on stocks with breaking news - stocks that are in play - is to simply "arb" the NY Open Book against the ECNs. This is all about speed, and whether you can get the fill (which comes down to clicking within a fraction of a second, years of Quake and Counter-Strike playing have payed off!), as well as a bit of luck.
The idea is simple. You watch the NYOB, and wait for a large order to cross the market (note: what is considered large takes a little experience to get a feel for, it all depends on the other size in the book, the day's volume, how it's been trading today, etc.) and then you make a move. For example, let's say a stock is trading 25.50's. All of a sudden a large order goes bid at 25.75 in the book, in a situation like this I would look to sweep up any sell orders in the ECNs up to 25.75 (assuming the order is large and will cause NY to go bid at .75). Ideally, I will get long off of some sell orders in the .60-.70 area that couldnt cancel as fast as I could buy them, and then I would use a little bit of feel to decide whether I want to dump my newly acquired shares onto the .75 bidder or offer it up a little and see if others playing this game are willing to bid it even higher.
When it comes to pricing a security, information is king. SAC Capital, run by Steve Cohen, one of the largest and most successful hedge funds, I remember publicly stating in some article that their primary edge was getting information before others. I think I remember them writing how they would constantly hound all of their contacts in the equities industry, every analyst, every banker, making sure that when big news is breaking they're the first to get the call.
There are almost countless ways to define an informational edge, as well as to take advantage of one. I'll bring a simple one (that may be gone soon, as a result of new reg SHO rules and ARCA/NYSE merger). One trade that I still like to do on stocks with breaking news - stocks that are in play - is to simply "arb" the NY Open Book against the ECNs. This is all about speed, and whether you can get the fill (which comes down to clicking within a fraction of a second, years of Quake and Counter-Strike playing have payed off!), as well as a bit of luck.
The idea is simple. You watch the NYOB, and wait for a large order to cross the market (note: what is considered large takes a little experience to get a feel for, it all depends on the other size in the book, the day's volume, how it's been trading today, etc.) and then you make a move. For example, let's say a stock is trading 25.50's. All of a sudden a large order goes bid at 25.75 in the book, in a situation like this I would look to sweep up any sell orders in the ECNs up to 25.75 (assuming the order is large and will cause NY to go bid at .75). Ideally, I will get long off of some sell orders in the .60-.70 area that couldnt cancel as fast as I could buy them, and then I would use a little bit of feel to decide whether I want to dump my newly acquired shares onto the .75 bidder or offer it up a little and see if others playing this game are willing to bid it even higher.
