tabasco
Have you read this
http://www.moneyam.com/TradersRoom/posts.php?tid=1913
15 Jan 2004
Crocodile takes on the robots - Shares Magazine article
David Croc Anderson used to sell computers, but he really began making money out of them when he spotted computerised trades on the stock market. By Jeremy Lacey
For David Anderson, aka Croc, it was a Matrix kind of experience the moment he suddenly realised that what he was seeing out there was being run by machines, not people.
Anderson is a doyen among day traders and a stalwart of the MoneyAM bulletin boards, where he appears under the user name Crocodile. The crocodile in question is a now rather battered looking cuddly toy which sits on a sofa in the Anderson conservatory, and the two of them go way back.
My background is in computers, he explains. I had my own business from when I was 20-odd years of age until I was in my mid-forties. My company was originally called Anderson Computer Systems. It was doing OK, but after I changed the name to Crocodile Computers suddenly we tripled our turnover in one year.
So what took him from selling computers to sitting in front of them trading shares?
I saw the writing on the wall when Tescos started selling computers they were open 24 hours a day and I thought, this is going to get worse and worse and worse. Six or seven years ago, I decided it was time to get out.
Anderson had become interested in trading and was active on the bulletin boards. I got to the stage when I thought, OK, I can do this for a living. I had an offer for the business, so I thought I would sell it and see if I could survive the year share trading. Much to my amazement, I managed to bring in somewhere between 5% and 10% a month on my capital.
He was trading away happily, making a steady if unspectacular profit, when something odd struck him about the figures flickering across his screens. I noticed there were trades going through that were not being put in by humans and Im not talking about aliens here, either, Im talking about computers.
Like Neo, the brooding hero of the Matrix movies whose world is exposed as a stream of binary code, Anderson realised it was the machines that were pulling the strings. The first one I noticed was on ICI, a 50,000 buy at the top of the order book. I was short on it selling and hoping to buy back at a lower price. There was only one order left so I thought when that goes then Im going to be in the money.
Anyway, the 50,000 disappeared and instantly turned up with another 50,000. I thought that blokes got fast fingers! I waited another minute and 50,000 got taken out and instantly came back. I wasnt too suspicious at this point, but then it got taken out 10 times in one session.
I opened up a thread on one of the bulletin boards saying Robot traders could be damaging your wealth. Much to my surprise, that night I had a phone call from Merrill Lynch to ask me where Id got that information from. I thought thats it, thank you very much indeed!
From there, I started noticing other computerised trades and eventually realised that nearly every share on the stock market is traded by computers constantly, and that there are different types of computer trade. Anderson takes credit for coining the term robot trade, which became shortened to bot and is now part of the common parlance of traders when they talk about automated computerised trading systems.
A solid Brummie, Anderson is an unlikely Neo. He works from home in the West Midlands town of Sedgley, perched on a hilltop with an uninterrupted view across miles of rural tranquillity towards the Welsh mountains.
He has done well as a professional trader: evidence his second home in Le Touquet. These days he makes a few bob by letting others in on his secrets and would-be traders regularly pack into the Sedgley conservatory for training sessions. He cautions novices against unrealistic expectations, though.
If you can make somewhere between 20% and 100% a year on your capital through share trading, then youre a very good trader and beating most people in the City. Anyone planning to make a living out of trading needs to start by working out exactly how much money he or she needs to live on, he says, and then be very realistic about the potential returns.
Ive had some young traders in here who want to be professional. I ask them how much money they have to invest and they say 10,000, so I ask how much they need to live on and they say a minimum of 3000 a month. Which means they have to make 30% every single month, and thats without any growth in actual capital. Theres no realism in there whatsoever. If you could pick a share that would give you a 30% rise each month, youd have the best share tip ever. But back to the bots: what were Merrill Lynch and the rest of the big investment houses up to, and how many other people knew what was going on?
Apparently within the industry, they knew roughly how it was done. If an institution wants to buy, say, three million shares it cant just go to the order book with that because all the sellers would instantly disappear, so they have to split them into smaller amounts. In the industry they used to call these small amounts tranches and most people thought these tranches were put in by traders but its far more efficient to let the computer do this for you.
The good thing for the trader is it shows you where there are big orders its a giveaway. It tells you the shares you ought to be considering buying or selling and also not to go against them.
After I started to notice this it doubled my profitability from 5% to 10% a month within a year. And its not difficult to spot. Anderson showed me one sure sign to watch for on his Level 2 screens: small random numbers of shares, say 545 or 675, where it would appear difficult to cover the trading costs but which nevertheless were constantly going through. By drip-feeding their buys and sells every hour, every day, the institutions can move huge numbers of shares without alerting the market, and thats where the computers come in. If youre a very large broker like Merrill Lynch or whatever, you cant have 300 traders sitting in front of a screen dealing all day. They would have to have a huge, expensive trading room, so its traded on a computer.
Different types of robot have been identified, like the piranha bot, which takes tiny small bites and keeps nibbling away. Or the sheep bot, which always follows wherever you lead it. I watched while Anderson found a sheep bot and steadily upped the price. Its programmed so that it always has to be at the top, so if you go in front of it, it joins you even if you only put in 10 shares at a halfpenny above it. If you have a position on a share, you can force the price up and take control of the stock.
You could move the share price up 10p to 15p with one order and because you know this sheep bot is about to move up, you can be ready to sell as soon as it gets there, so short it.
If you catch the right one on the right day you can make enormous amounts of money on it. He recalls one rewarding spell of trading in France last summer when he made a 2500 profit in 15 minutes. Once you know how these computer systems work, you can take advantage of them. Its like having a repeat jackpot on a fruit machine, until someone spots what youre doing and stops it.
Knowing how the computers work and learning to spot the bots is perhaps easier than it sounds. When Anderson points out what is happening on the charts, it all looks blindingly obvious but some of us might need a bit of practice before we can do it for ourselves. For readers who want to find out more, a good starting point is Andersons website, www.snappytrader.com.
While recognising bots gives traders a chance to make quick profits on one stock in a single trading session, there is also money to be made by grasping the bigger picture of how computers play the market and spotting the support and resistance levels that decide the ranges they trade in.
The large institutions and hedge funds put the money in the top and just let the computer trade the market, says Anderson. Once you can spot the line, you can see where the computer is currently trading the market. Theres no point trying to stand up to the computer, because eventually it always wins.
Analysis of the charts gives Anderson a pretty good idea of where he thinks the computers are going to start buying and selling the market. At the same time, he says, the largest stocks are virtual trackers, moving in line with the index. If you take a one-year chart of Barclays, say, and overlay the FTSE, you can see the correlation. If youre doing technical analysis on Barclays are you actually doing technical analysis on it or on the market itself? Because theres such a strong correlation.
Which means that if, for example, you can predict the market is going to run out of steam today and the computers are going to start selling, you can assume the same will apply to Barclays and any other quasi-trackers.
The canny trader has an additional opportunity here, because there is a slight delay between the movement in the index and that of the individual stock. A lot of traders get slightly paranoid because Barclays is going up and the instant they buy it it starts falling, while the second they get out it starts going up again. If theres a big move on the market you can often get a bargain because some of the traffic hasnt yet moved.
His conviction that the big institutions computers trade the top stocks as index trackers led Anderson to the idea that dividends create opportunities.
Logically, the price of a share going ex-dividend should fall by the amount of that dividend: eg if a stock closes at 120p on a Tuesday and goes ex-dividend on Wednesday with a 7p payout, it should open at 113p. But it doesnt always work out like that, and according to Anderson one reason is that computers are dumb.
The computers have no idea that a companys paid a dividend all theyll see is the fact that its price has dropped below the percentage for the FTSE. The nice thing is if for example you have a company paying out a 6% or 7% dividend, youll know darn well that as a tracker its going to be brought back into line with the index.
David Andersons world is a fascinating one in which a lone trader patiently researching the charts is able to milk opportunities created by some of the worlds biggest investment houses. Machines rule but man makes a nice little earner.