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I've been intrigued by the discussions about VSA here so I had a long chat with my brother in law about how institutions buy stocks.
He is a broker in London (I'm from the UK) and handles large institutional buy and sell orders on a daily basis. He's in a great position to understand institutional stock trading strategies. His wife was a fund manager for a pension fund, so I asked her about it too.
His institutional customers use VWAP (volume weighted average pricing) and judge him by how much his average trade entry price is below VWAP.
An institution will task him to buy, say, 600,000 stocks. It is then up to him to negotiate the best buy price for that trade during that trading day.
Neither he, nor the institution are looking to buy into down days to hide their volume other than achieving the best price for that trade, as per VWAP, on that day.
Even when the institutions are buying over 1,000,000 shares in a day, that volume will not have significant effect on the price as they only trade in very high volume stocks.
So his institutional customers, at least, do not use any "smart money" stratgeies when buying. They need to buy on a certain day and use a broker (him) to get the very best price on that day.
His institutional customers are mostly looking to invest over a very long period - years, depending on their investment strategy for that stock (capital growth, dividend yield etc etc), they are very rarely adopting a strategy lasting a few months.
My brother in law succeeds (he is a very wealthy guy) as a broker by his performance against VWAP - not his ability to operate smart money strategies. He actually didn't have a clue about the "smart money" strategies I was describing. He has UK institutional customers trading in UK, European and US markets.
So I'm left wondering what "smart money" is - it probably isn't large institutions such as pension funds, insurance companies etc.
Maybe US institutions trade differently, but I doubt it.
This is an excellent article about VWAP and how companies such as JP Morgan and Goldman Sachs use it for automated trading:
http : //db dot riskwaters.com/public/showPage dot html?page=129980
Chris
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Thanks Chris, for that very fantastic bit of info and excellent article. I found this quote quite interesting:
"You have to constantly readjust your algorithms, because what worked last month may not work this month. You can see by the volatility index and everything else, stocks don’t necessarily trade the same way. We generate a different pattern for every single different symbol, and it’s updated constantly. It’s a never-ending task."
Now, and please forgive me if I get this wrong, but wouldn't one way to achieve the best VWAP be to buy into declining days and to have those declining days close up, higher than the VWAP thus making an average purchase price look favorable?
It's human nature to want to look good and from what I understand, after reading up on VWAP, VWAP is easily manipulated. And when something is easily manipulated, you can bet it's going to be.
In any industry I've ever worked you have employees who want to look good. From this desire grow tricks of the trade.
But anyway...back to smart money. As I understand it, 10 percent of the worlds population controls 90% of the wealth. This is the smart money I think of when discussing "smart money". And I'm sure, there's a mythical element to smart money as well. That's also human nature.
Retail traders, struggling to understand the market and having difficulty generating profit, project their deep seated desires onto an imaginary, all powerful group of smart money operators who are able to time the market perfectly and profit every time. Sounds natural to me.
I don't consider institutional traders smart money. According to an earlier round table analogy of the market I discussed, institutional traders are primarily trading for the public trader. Judging by the number of these funds that under perform the market year in year out, I would be hard pressed to put them into the "smart money" category.
From what I understand, and according to a friend currently at Harvard business, most of the institutional traders come to the market with a efficient market hypothesis background and judging from the educational material and the market club materials (I have happily been privy to these) they're all value traders. Looking for downtrodden markets to get involved in because of the sheer size they'll be trading and their long term horizon.
I don't pretend to know who the "smart money" is or even if they exist, but if the public is fleeing heavily sold markets, and the Harvard business grads are value buying these markets, either because they've been conditioned to see opportunity there or because the "trading syndicates" are manipulating prices downward for better entries, I'm pretty sure I know where I want to be.
Thanks again for the very interesting and informative post Chris.
David John Hall
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Operandi, no smart money is not institutions. It is difficult to say who they are, maybe a little easier to say what they are. First keep in mind that there is currently some debate on this subject and I am only giving you my opinion. I have been trying to follow the movements of Smart Money now for years through long hours of chart study by focusing on Volume vs price action.
Smart money, the big boys, the market movers are just simply groups of large investors with the most money to invest. Think about it in terms of, what does it take to move price or manipulate a stocks direction. Whatever this is the smart money has it, and they are very adept at using it. They are privy to the future undercurrents that affect the stock markets long before we are and they position themselves to be in the right place at the right time to maximize their results.
Their have been many theories about the ability to track the movements of these market movers. Some say you are wasting your time. You have to decide that for yourself. I am sure of at least one person that is soon to post a counter point to everything that I just said, but the difference between us is that he gives no opinions of his own. Instead (how would the British say it) He rather enjoys knocking down fences.
I hope that you receive other replies to your guest ion as it is good to view multiple interpretations.
Good luck
Apsll.
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operandi ...
I think pretty much the same thing happens everywhere ...
Huge blocks ... privately negotiated ... that tend to clear the exchanges very near the close ... or even in the basket session ... that may even be slightly out of the market ... yet that have little (or no) effect on the next day's trading ...
A necessary methodology to prevent them from moving the markets against their motivations ...
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Thanks, David and Apsll for your thoughts and comments
QUOTE"Now, and please forgive me if I get this wrong, but wouldn't one way to achieve the best VWAP be to buy into declining days and to have those declining days close up, higher than the VWAP thus making an average purchase price look favorable?"
Looking at the VWAP formula (taken from Wikipedia), share purchase price is only one of the components, hence the volume weighted aspects:
From Wikipedia:
QUOTEVWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market. It is sometimes argued that such execution reduces transaction costs by minimizing market impact (the adverse effect of a trader's activities on the price of a security).
The VWAP is calculated using the following formula:
where:
- PVWAP = Volume Weighted Average Price
- Pj = price of trade j
- Qj = quantity of trade j
- j = each individual trade that takes place over the defined period of time, excluding cross trades and basket cross trades.
I know the broker will broker the deal to get the best prices for the trade, or trades, as per the VWAP formula, but he has to place those trades during that day. So he has leeway to look at the market and decide if the intraday price is moving up or down, but would have to have strong justifcation to delay execution from one or more days.
Given the long term investment strategies of the institutions, small trends in share price, as would occur during down days, are probably immaterial compared with their investment timescales. Tis is how I think of "smart money", but I'm not really sure about this either TBH.
As you say, it takes huge volumes and massive amounts of money to move the share price. I can understand groups of investors trying to do this in a small number of stocks, but to make these massive investments across the range of stocks in the Russell 1000, for example, would take billions of dollars.
QUOTE Smart money, the big boys, the market movers are just simply groups of large investors with the most money to invest. Think about it in terms of, what does it take to move price or manipulate a stocks direction."
That money is within institutional bounds, but I wonder if it exists to that level amongst other high net worth investors.
It makes me think that "smart money" may be actually be automated trading systems converging in algorithm and execution performance, and therefore starting to work in concert.
I have a friend who is a computer programmer for the investment banking arm of Royal Bank of Scotland.
He works in a team of four trading forex. In that team there is him, a quant and two statisticians. They are targetted with making 0.5M GBP per day.
He is given the algos by the other three and then spends his time making the automated trading system as fast as possible. For example, they house their servers in the exchange data centre for maximum communication speed with the exchange API (application programming interface).
There is no broker in the team and no human interaction in any of the trades. The system makes around 10,000 trades a day, and relys on statistical advantage and execution speed to create the edge and make a profit.
They tweak the algos and he tweaks system performance, but the competitive systems in other banks are tweaked too to regain their edge. This creates a convergence of algos and system performance.
So the retail trader cannot hope to compete with these systems. Perhaps the way to at least be near their playing field is to use their approach as far as possible. The only retail trader I have heard about that attempts this, is Linda Raschke.
If you read this article, she places high emphasis on statistical probability to help predict trade directions. She seems to back this up with highly automated systems and analysis. Maybe this is how she can start to compete, in a small way with the flow of "smart money" and the way it's traded.
http :// www dot traderslog.com/lindaraschke dot htm
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QUOTE (operandi)
As you say, it takes huge volumes and massive amounts of money to move the share price.
Really?
I didn't know that.
Hmmmmm.
Time and time again I've seen price move significantly during the day
without hugh volume surges. Price is not dependent on volume.
Volume follows prices.
Thanks,
mp
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smart money in gambling is someone who bets and has privileged information.
smart money in stocks are simply experienced investors and traders who tend to spot trends and find investment opportunities before everyone else.
Financial institutions like banks, insurance companies, hedge funds and pension trusts own the vast majority of shares of stocks around the world. As an example, the largest public mutual fund that only owns shares of companies in the Standard & Poor’s 500 Index -- the Vanguard Index Trust 500 Portfolio -- has less than $50 billion in assets. In contrast, the world’s financial institutions are estimated to hold more than $600 billion worth of S&P 500 stocks.
These financial institutions have the best investment research in the world available to them, and regularly visit the management team of companies in which they buy shares. Consequently, they are considered to be the "smart money" that everyone talks about.
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Operandi,
Thanks again for sharing this information. It's fascinating to hear how the institutional players operate. And that they are constantly updating their trading systems and algorhythms. About a year ago I realized that systems have to be monitored and watched for breakdown and tweaked accordingly as the environment changes. Each month I run tests to look at what the average upside gains in stocks are vs. average downside gains. in the markets I trade I look at how fast and far upswings tend to occur vs. downswings, and this colors what I look for as far as targets and stop-losses goes and it has helped tremendously.
It's just great to get first hand knowledge of what goes on.
David John Hall
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QUOTEEach month I run tests to look at what the average upside gains in stocks are vs. average downside gains. in the markets I trade I look at how fast and far upswings tend to occur vs. downswings, and this colors what I look for as far as targets and stop-losses goes and it has helped tremendously.
Hi David
Maybe a systematic approach like that contributes to your edge, when competing with less able retail traders.
The more I learn about institutional trading, the more often I come up against the term "statistical probabilities". That automated trading system at RBS only works with very large numbers of daily trades as that is the only way that statistical probabilities can be made to work in their favour.
For example, it is telling that their four man Forex trading team consists of two statiticians, a technical analysts and one programmer
QUOTE Time and time again I've seen price move significantly during the day
without hugh volume surges. Price is not dependent on volume.
Volume follows prices.
Hi mp - If volume follows price, doesn't that negate price predictions based on volumes (VSA) at a stroke?
Thanks for the great comments and thoughts - keep them coming :)
Chris
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Operandi thanks for taking the time and effort in bringing up this informatios, which by the way I was aware of.
I just will not take the time to provide support for many of my comments as I believe my word should be enough, also time is money and my time here is free.
After all many here will continue to do their nonsense practices regardless of whatever information you present them and time will be wasted. And I have been wasting way too much time around here lately.
I have brough up the fact over and over, that there is very little transparency in the markets, and that noone can decipher the real intentions of folks behind those volume bars. All you can read is what the technical data tells you - volume amount and on a down or up day. The rest is all assumptions.
The amount to move price in a stock by the way is directly proporcional to the amount of shares being traded. You don't need even a million to move a stock trading 100000 shrs at $5.
Over 80% of the market is moved by hedge funds, pension funds, trust departments, insurance companies, mutual funds etc. Whether it is smart money or demental money I guess we will never find out, and transparency will continue to be as murky as the Missisipy river.
The closer you are ever going to get to that transparency is your TOS and your level III as it is happening. And still you will never know who per example GSCO may be loading or unloading, but you can know whether there is loading or unloading. That is as close to the know as you will get other than having inside information, which by the way many do.
Take care.
Take care.
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What about POT from mid-2006 to today?
HANS from mid-2003 to mid 2006.
RIMM from early 2003 to early 2005.
Is this ever smart money?
Thanks
diceman
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QUOTE (operandi)
Hi mp - If volume follows price, doesn't that negate price predictions based on volumes (VSA) at a stroke?
Chris
It has always been my contention that price leads volume.
I was willing and am still willing to keep an open mind about VSA
but I am not yet sold on it like Apsll is.
Market Makers move price. Market Makers execute the volume(shares) related to
the supply/demand sizes waiting to be executed by the them. Much of the time
Market Makers allow the direction of price to be determined by the next market order
that is executed e.g. the more sell market orders there are in a row, the quicker
the price direction will be heading down. The more buy market orders there are the more
chance of price direction moving higher. Limit Orders on the other hand are
hugely ignored by the market maker and therefore has far less chance of influencing
price direction.
So the market maket executes a price supply/demand node as he choose and whatever
shares are attached to that price get executed at that point (these shares waiting to be
executed are limit orders and will be executed as market orders move the price toward
the vicinity of these limit orders supply/demand nodes as I like to call them).
That's how I believe it all works.
Thanks,
mp
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didnt read the institutional VWAP article. TBH I think smart money is any one who make money in the market.. reguardless of capitalization. Any one who has found something that works well for them and continues to do it.
If they exceed the markets averages then they are smarter.(or luckier). did the VWAP article discuss how they exit.. ? ? ? Everyone is totaly obsessed with the entry and timing the market.... but that may not be totaly posible with perfect precision. Despite what courses say.
Smart money is probably those individuals that can make an assesment and decide that the time Is right to be in Stocks, verses bonds, verses cash, realestate, futures what ever.. or time to go boating for several months.
there are enough records of "smart Money" to know that many of them opperate slightly differently.
I think Livermore would classify, Larry Williams, Richard dennis. They are all guys who found an edge,, contained their risk and pushed their strategy to the limit or sat confidantly on the sidelines for long periods of time if need be.
"Ticker hounds" obsessed with playing the quick game I think generaly will not get far fast.... I"m coming to this conclusion more and more. when markets are trending well it dosent really make sense to swing trade when you could trend follow, trade less, leverage your position, and make more with less work.
thos peope who know where and when to shift thier money to get the best return on it are probably "smart money". No need for conspiracy theories.
IMHO
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QUOTEIs this ever smart money?
Sure, It was smart to have money in those stocks :)
As retail traders, though, I guess it doesn't matter to us who is providing those volume surges (or price surges that initiate the volume increases) that trigger those bull runs. We detect them in our charts and then react accordingly.
Chris
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I meant to say also that mutual fund managers generaly won't find themselvesl ooking like smart money.. despite their personal investments because the funds are often heavily and stupidly restricted by charter. Many can only go long and can only be a a maximum amoun in cash at any given time.
Why these restriction are put in place is probably to do more eith efficient markets theories that comes out of the Finance PHD's work and lookign at a long time frame etc etc etc.. but I won't talk crap .. I really don't know. It seems to me like strapping a cinder block to my neck and trying to tread water in the ocean for a long period of time.....not gona be really sucessful over the long haul. Naturaly i'ts not as simple as that... but if we are talking about big steady gains .. and slipping in and out of various markets at key times ... I think that the analogy fits..... uh more or less.
I've read that Hedge fund managers can bring in as much a s 500% returns. If I knew how to invest through a hedge fund I'd just do that to be honest..... at this point. I don't know if Richard Dennis is still managing capital for traders/investors but based on what i've read about his past performance.. seek him out after a down period for his performance and you might have a decent timing mechanisim to opean an acount through him.
If there are people that have made serrious money.. not starting with serrious money then I think they qualify as smart money and they have something valueable to bring to the table. it amazes me how much "the street" disreguards the work of Livermore and Darvas and Richards type traders/investors..... Your corner broker will tell you you can't time the market don't try.
Livermore, richards etc said it's quintessential to bringing consistant big proffit.
your corner broker will tell you that you gotta stay in the game and let it average out over time and you'll get ahead.
Livermore and Richards say that there may be months on end where there is nothign smart to do... Livermroe might go on a long fishing trip for weeks at a time and ocasionaly check a ticker tape or newspaper in a port. If he saw something he liked He's set sail for NYC.
i dunno.. when my corner broker and the PHD's that trained him have a 300 foot yacht gained from market money then I think they may have a valid point .. but when they are making less than 100k from professors that made even less..... I dunno. The picture just dosen't'seem right. .. .. But that's me.
I some times reconsider my current plan to finish my degree but switch from Biology to Economics (econometrics actualy) simply because I may already have to many internal biases. I'm likely to find me sitting in clas with an aluminum hat and humming to my self during the lectures I dissagree with. .
But serriously .. these people that come up with all these theories aren't dummies. They are smart people.. so what gives?
One of the math proffessors I met a a faculty picknick was sayign that some of his students that went into math behind gambling theory, statistics and probabilities and such have gone on to do very well on wallstreet. Made a point of the gambling theory math.
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smart money for my understanding are the number crunchers (fundementalists) sp not close its late. from the business schools. smart money in our area are those who follow the trends and invest with them, following the trends of the number crunchers, hired by large investors. one of the brokerage houses, out of business now had a book on following or finding the way stocks follow the economic cycle. I'll look to see if its around here. it goes something like this, as the end of a recession is completed orders to businesses start to uncrease, this causes an increase in the comodities needed to build the products ordered. than shipping crates, cartons, shipping/transpottation etc... increase, begining the new cycle. while this economic cycle moves along, the numbers crunchers are looking at all types of venture capitalists looking for the next google, mirosoft, etc...
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Diceman look at RIMM on a monthly chart. Before I was even studing VSA in my early readings they discussed how smart money moves the markets. You also know through my posts these few years that I have been studiying my perception of smart money movment (Bonanza Bottom).
Yes your examples are smart money. In RIMM monthly you can see it. You have the base in 2002 and then the rally in 2003 look at the volume levels. VSA and all my past readings say that price will only continue up if there is sustained buying pressure. Notice how in 2005 the stock consolidates. There is no more buying pressure so the price no longer rises. But the price does not drop either. This is because there is no distribution by the smart money, They are not only holding their shares but smart money is absorbing all the profit takers who are selling shares now. That is why the volume is not as high because there is no selling or buying pressure. Smart money knows now that this is a strong well known comapany, (they should know they did the research). Now they have more shares and again in 2006 after the May corection is over they run the stock up again and are still doing so to this very day. They are going to milk it for all that they can. After all they are smart...
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QUOTESmart money knows now that this is a strong well known comapany, (they should know they did the research).
But Apsll who is this "smart money"? Institutions who have attended company briefings, automated trading systems working in concert or brokerage houses (as Jim suggested) with a strategy that falls in line with institutional long term investments?
I know it doesn't really matter who "smart money" is, but my enquiring mind can't grasp how this concept of smart money works, particularly as a highly successful professional broker I know well hasn't heard of it or the strategy behind it.
Thanks, everyone, for your thoughts and comments, so far
Chris
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Operandi, in my research on the net, books that I have read, as of lately with Tom Williams. They all make reference to large groups of very rich and powerful people banding together to form trading cartels. Now is this science fiction? I do not know. Am I naive? Possibly. Why would I stumble across such references over a many year span from completely different sources? Every single one of us is at the mercy of our education. Even Bigblock is a product of his education and his experiences. Believe it or not back in 1992 he was still wet behind the ears. For me it was the late 90's.
One story that was fairly common (and I am sure others have read similar stories because they have read the same books) goes like this. The investor owns say 27,000 shares of stock xyz and he is holding as the stock is rising or consolidating. Next thing that you know they are contacted by someone??? This someone’s wanted to buy his shares out at $1 above the current price. In all the cases the investor holding these shares turned down their offer and held to their advantage because price eventually did climb higher.
Now what that means to me and them at the time was that the big boys wanted to buy up all the supply so as to create a huge demand for this stock. Who do you think these folks were that wanted to buy Mr. Investor out of his shares???
Bigblock is right if their is Smart Money out there then they are doing their best to stay hidden from us and all the Mr. investors out there. But can they?? That is the guest ion. Volume shows activity one way or the other if you are making purchase of shares then they need to be added and recorded to the regular volume. Thus the volume during these times of raw accumulation will be higher than normal, and the spread on price will be longer than normal and the close of price will be higher than the low of the bar. The other way they collect shares is easier for them to hide it is called absorbing any selling of shares, this way although volume is still higher than normal it is not huge and the spreads not so wide they may even appear as doji's. Did you ever notice that in most cases during a swing low or a small change in trend that you will see doji's. Most take this as a day of indecision. (IMO) this is just buying absorbing the selling. The buyers are eating up more supply thus creating demand and then price rises. (Not necessarily thee rally at this time)
So now I am done that is how I view Smart money.
Bigblock not to start trouble but you have stated that I say my way of trading is the only way, and that cannot be farther from the truth. Yes I am out spoken, I will even accept "big mouth" but most of the time I use the disclaimer that all my statements are just my opinions. Look back through my posts and you will see this. Lastly If I am such a fraud then why do I get folks on this forum that tell me they make money from my ideas and stock picks. On the other forum you can send private messages to each other and I get many thanking me for my picks and ideas on trading.
I do not claim that any of my theories in the markets are fact, I never have. But they work for me and in the end that is what matters.
Apsll.
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QUOTE (operandi) QUOTESmart money knows now that this is a strong well known comapany, (they should know they did the research).
But Apsll who is this "smart money"? Institutions who have attended company briefings, automated trading systems working in concert or brokerage houses (as Jim suggested) with a strategy that falls in line with institutional long term investments?
I know it doesn't really matter who "smart money" is, but my enquiring mind can't grasp how this concept of smart money works, particularly as a highly successful professional broker I know well hasn't heard of it or the strategy behind it.
Thanks, everyone, for your thoughts and comments, so far
Chris
Success as a broker dosen't usualy come as a stock picker...portfolio manager. Most are sales guys. I know a broker who is highly sucessfull and dosent know how to read charts behind the slope is up so that must be good. They have lists of valuation models and those are the items that are pushed.....The model suggested INTC in DEC 05'
allot of brokers work from a completely different perspective than tradrers do. They see us as the riskiest participants in a market. they say that it's impossible to time the market don't try ... They look for value usualy... which mean buying and averaging over time depressed sectors becasue EVENTUALY they will make a recovery. Problem is Why work on such a long time frame ... buying Airlines now because they will Eventualy recover is gonna tie up my capital for a long time and maybee give me pretty good heart burn during the wait.
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Very informative ideas on "smart money" in the last few days. Thanks
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SMART MONEY :
investors who make profitable investment moves at the right time, no matter what the investing environment. In a bull market, such investors buy the stocks that go up the most. In bear markets, they sell stocks short that fall the most. Smart money investors also have access to information about companys, either positive or negative, in advance of when the typical small investor learns of it. The term is also used in a more general sence to convey what sophisticated investors are doing now. Analysts will say "the smart money is buying cyclical stocks now because the economy is improving," for example.
came accross the Dictionary of finance and investment terms, easier than looking for a book 20 yrs back..
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[quote]Smart money investors also have access to information about companys, either positive or negative, in advance of when the typical small investor learns of it.{/quote]
Thanks,for that, Jim
Maybe this goes some way to explaining the "smart money" strategies that we discuss here. The smart money is purchasing (or selling) before the retail investor knows changes are about to happen.
In the case of the buying cycle, they accumalate shares because they know that prices will rise soon.
However they may not be trying to actively manage price increases, they know the probability is high that the share price will increase once their knowledge hits the general public.
Maybe this is where VSA ties into it. VSA picks up the gradual accumalation of shares ie more shares are accumatated rather than distributed during that phase. As we know, prices can rise through lack of selling pressure, so if they are not being sold, the price must increase as demand outstrips supply.
Going back to the instutions then, because they have been briefed that something good is going to happen, they decide to purchase shares in that company (which is what the company wants, of course).
In high volume stocks even a large purchase will go unnoticed on that trading day, but volume trend indicators such OBV will indicate that activity and alert us to impending price action.
Chris
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[QUOTE=operandi
In high volume stocks even a large purchase will go unnoticed on that trading day, but volume trend indicators such OBV will indicate that activity and alert us to impending price action.
Chris[/QUOTE]
thats the way I see it, on my slow days I can attempt to out smart the market with complacated indicators which only confuse me. if I need to think too much, I walk away for a break.
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