TUES. AUG. 3- Direct Edge Stock Exchange

As a heads-up, this is going to the third (the first was on algorithmic trading last week with the second an overview earlier this week) in a series of blog posts about a major change that has recently occurred in trading for immediate-term traders. For today, I want to give some background but will add more specifics to today’s piece in the coming days.

For betting junkies out there who gamble based on published odds (of which in full disclosure I am not), I can imagine you get the same thrill out of figuring out whether a line on a game seems tilted, whether the odds of a certain celebrity winning an Oscar seem not quite right, or take equal joy in any of a myriad of other conduits for gambling. Imagine if while betting you had access to the book of the 3rd largest casino in the country. Now imagine if you had an extraordinarily powerful program which allowed you to seize upon inherent discrepancies in line based on essentially every combination/scenario of bet possible on any given line. I’m not done. Imagine if your computer had a tiny bit of time to process all of this ahead of most other bettors. Now, let me ask? Do you think you’d have an inherent advantage (right or wrong…I am being totally amoral here) if you didn’t have the information nor the casino? Well, such a change occurred on July 21. On that day, the Direct Edge market (purveyors of the EDGX and EDGA monikers to you and me) became an exchange. OK. So, what’s the big deal? Well, Direct Edge has helped to encourage high frequency trading and was one of the pioneers in offering investors the controversial practice of flash orders. Furthermore, there are seemingly innocuous press releases out daily such as this one from July 29 from PR Newswire:
NEW YORK, July 29, 2010 /PRNewswire/ -- Correlix Ltd., the leading provider of Latency Intelligence(TM) solutions for monitoring, measuring and analyzing order and market-data flows in real-time, today announced that Direct Edge, America's newest stock exchange, has selected Correlix's RaceTeam latency monitoring service to provide full latency transparency of order execution and market data flow in real-time to its customers.
The RaceTeam service will enable Direct Edge to provide real-time latency insight into its new EDGX and EDGA exchanges, including displaying the matching engine timing. This new level of data availability will enable Direct Edge customers to optimize their trading strategies.
"As one of the few markets willing to provide latency details up to the matching engine, we are excited that through the Correlix RaceTeam service, our customers will have a valuable toolset to better optimize their experience on our new, state-of-the-art trading platforms," commented Bryan Harkins, Head of Sales and Strategy at Direct Edge.
RaceTeam is an objective venue-neutral service that enables trading firms to manage and receive real-time Latency Intelligence information from various trading venues. The RaceTeam service facilitates greater trading latency insight into each transaction and leads to optimized trading strategies, improved trade execution and streamlined inter-party latency problem resolution.
"We are pleased to welcome Direct Edge and its two new exchanges to our rapidly expanding RaceTeam service," said Shawn Melamed, Founder and President at Correlix. "As Direct Edge introduced faster matching engine technologies into the market, we are seeing an increased demand from customers to better understand the latency behavior on these new platforms in an effort to determine the best way to trade."
The RaceTeam availability of Direct Edge data is expected in the fourth quarter of this year, subject to SEC approval. For RaceTeam participation information, please contact your Direct Edge or Correlix representative.
OK. So what does this mean exactly? In being granted exchange status, Direct Edge can now ac in the same vein as, say, a NASDAQ versus as a mere electronic communications network. Furthermore, they clearly desire to not only optimize the speed at which EDGX and EDGA data appear on the level II’s, but the real purpose was stated in the press release: “The RaceTeam service will enable Direct Edge to provide real-time latency insight into its new EDGX and EDGA exchanges, including displaying the matching engine timing. This new level of data availability will enable Direct Edge customers to optimize their trading strategies.” In line with this, Direct Edge clearly seeks to sell data to entities like high frequency trading firms and can do so because they are an exchange. If you cannot tell where I am going with this, ostensibly very powerful machines with access to an almost infinite number of algorithms can now take advantage of a slightly slower updating of quotes for most traders. Again, I take the amoral ground here. For instance, I have an inherent advantage using a high speed cable modem over someone using an old school dial-up 56k modem. But basically, think of it as the old SOES system taken to an extreme level. Just as SOES bandits were able to take advantage of relatively slow-updating of prices by market makers in placing large orders in tiny pieces and selling them out quickly in minutes or even seconds. This has thusly set in motion an entirely different way for stock prices to react in the immediate-term based on what I and many others have observed; I will discuss this more in coming days.
Markets in Asia were generally higher overnight with Hong Kong up 0.2% and Tokyo ahead 1.3%. Prices are more mixed in Europe with the DAX off 0.1% but the FTSE and CAC down almost 0.5%. Oil and gold are both ahead about 0.5% with the dollar getting hit rather hard against the yen and euro. Bonds are steady. With the 10-year hovering at 2.92%, stocks just seem somewhat cheap to many particularly with the dollar declining thus a trigger behind yesterday’s rally. With earnings mixed, however, stocks are mixed early on. Look for the gains to hold as the morning goes on in a choppy session as the cheap dollar does battle with poor earnings at the likes of PG. Focus on the earnings in particular with casinos and drillers sectors of interest.


Reiterating-

If the whole story is not there -

If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.

If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-


Good- The following stocks have good news and/or a strong technical pattern

VRSN- decent earnings

HLF- great earnings

HOLX- good earnings

RTEC- decent earnings

CGNX- good earnings

RIG, APC, APA- closed near highs

CLF- closed near its high of the day

IBM- closed near intra-day high

X- closed near intra-day high

CAAS-closed near intra-day high

OPLK- good earnings

SNTS- decent earnings

VMW- on “Mad Money” last night

CTSH- great earnings

COH- good earnings

EMR- good earnings

SOLF- good earnings

ADM- decent earnings

PFE- good earnings

MRO- decent earnings



Bad-The following stocks have bad news and/or a weak technical pattern

SYKE- terrible earnings

KGC- announced major acquisition and will be issuing stock to finance it

BGC- poor earnings

BMRN- poor earnings

TNS- terrible earnings

SBAC- poor earnings

HK- poor earnings

PFG- poor earnings

BHI- terrible earnings

DOW- poor earnings

PG- bad earnings

RDN- poor earnings

VMC- bad earnings

MGM- bad earnings

MA- poor revenues in its earnings report

BYD- terrible earnings

SM- poor earnings

Earnings:

TUES AUG 3 BEFORE

ADM AMT ARM

BBG BHI BYD

CLX COH CTSH

DF DHI DOW

DTG EMR ETR

HCP HK LEA

MA MLM MMC

MRO NYX OSG

PFE PG PH

RDC RDN SII

SOLF THC VNO



TUES AUG 3 AFTER

APC AVB CBS

CHK ERTS HRS

HTZ INT JAH

LBTYA LEAP OKE

PBI PCLN PL

STEC UNM WFMI

WMS XCO XL

Epiphany Trading, LLC
www.epiphanytrading.com

Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner