Tuesday, December 16, 2008

A NYSE TICK Primer: How to Assess Intraday Sentiment

Although I've posted details in the past, I decided to respond to recent questions about the construction of the Cumulative Adjusted NYSE TICK with two dedicated blog posts. This post will explain the basics of the NYSE TICK. The second will explain my use of the Cumulative Adjusted TICK. For those interested, here is a link to many past posts on the topic of the TICK, many of which explain how I use the indicator in intraday trading.

So let's start at the start. In an auction market, we have buyers who would like to acquire stock at a relatively low price and sellers who would like to part with their stock at a relatively high price. When all buyers and sellers are assembled in the marketplace, we have an established bid price for the stock (the highest price that buyers will pay) and an established offer price (the lowest price that sellers will accept). The spread between the bid and offer will be quite narrow for actively traded issues; wider for less liquid instruments. Market makers provide liquidity to the market by actively buying bids and selling offers, profiting from the spread.

A patient buyer will work an order in the book below the prevailing price, bidding for the stock or futures contract at a price that he/she considers to be a good value. A patient seller will work an order above the prevailing price, offering the stock at a price that he/she considers to be a good value. As a result, there are always resting orders above and below the market. The number and volume of these orders, arrayed by price, is what is known as depth of market. Market makers and true scalpers (those whose trades last a minute or so or less) often rely on shifts in depth of market to identify when the market is skewed toward buyers or sellers.

If a buyer is not patient and feels that the market is headed higher right now, he/she will not work a bid below the market. Rather, they will "lift the offer": they'll place a market order and accept the best price offered by a seller. When this occurs, the stock or futures contract will typically trade on an uptick, at the offer price in the bid-offer matrix. The motivated seller thinks the market is primed to move lower right now and "hits the bid", accepting the best price offered by a buyer. This transaction will occur on a downtick, at the bid price in the bid-offer matrix.

Over time, we can look at how many transactions across all stocks occur on upticks versus downticks as a way of assessing whether buyers or sellers are more motivated. This statistic is called the NYSE TICK. It is calculated by the exchange 10 times per minute (every six seconds), typically under the symbol $TICK. A TICK value of +500 means that 500 more stocks traded on upticks than downticks in the most recent six second period; -500 would mean that 500 more issues traded on downticks than upticks. We can track changes in the TICK over time to see whether buyers or sellers are becoming more aggressive on a short-term basis.

A different view of very short-term sentiment is Market Delta. Instead of looking across a range of stocks to see how many are trading on upticks versus downticks, it calculates the volume of shares or futures contracts traded at the market bid versus offer for a single instrument. This is very helpful when the instrument may be imperfectly correlated to the broad stock market. Many times, for instance, we can see a neutral Market Delta reading in the ES futures when NYSE TICK is quite positive or negative. Most often, this means that sentiment is neutral among large cap issues, but more positive or negative among the large number of small cap issues that are part of the NYSE TICK universe.

Finally, we can use the same logic as TICK to construct measures of money flow. We multiply the price of the stock or futures contract times the volume traded for each transaction. This gives us the dollar volume of the transaction. If the transaction occurred on an uptick, we add the dollar volume to a cumulative total; if it occurred on a downtick, we subtract the dollar volume from the cumulative total. This money flow measure identifies whether large market participants (those trading larger volumes) are predominantly lifting offers or hitting bids.

These are among my favorite market indicators, because they are grounded in the actual auction market behavior of participants. They do not rely upon esoteric interpretations of chart patterns, oscillator readings, or market waves. The minute-to-minute readings of TICK and Market Delta help intraday traders understand whether markets are becoming stronger or weaker. When we cumulate these readings over time, we can assess sentiment shifts over longer time frames.

In my next post in this series, we'll look at how you can cumulate the NYSE TICK and use the data for an understanding of market trends. Please note that I update the Cumulative Adjusted NYSE TICK every Monday in my weekly indicators post; I post money flow numbers for the Dow stocks each morning prior to the start of trading days via Twitter.
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11 comments:

SSK said...

Hello Brett, thank you for that review! I look foward to your next post. I think only the NYSE has the tick, to bad other exchanges around the world dont offer such a metric. If you know of one,could you please share? Thanks, and keep up the good work! Best, SSK

Jim said...

Thanks for the TICK reviews Doc.

As an aside, my son is working on his doctorate in psychology, but seems to have a keen interest in learning how markets operate. If he was your boy, what books would you suggest he read (I've already bought your book for him for Christmas)?

Thanks again.

Jim

Ziad said...

Hi Jim,

I'll chip in with my opinion as to the best books to read if one wants to learn how markets TRULY operate. There are a million books out there that talk about pure technical analysis (i.e. chart formations etc.), and while it's important to have a basic understanding of these things, they don't truly explain the inner workings of the markets.

To get that kind of insight, I would suggest the following books:

- Mind over Markets by Dalton (this books is a misnomer. It has nothing to do with psychology and everything to do with explaining the auction market theory in incredible detail. But I would recommend that your son not get bogged down in the techniques outlined, some of which are outdated, but rather grasp the market principles it imparts)

- Intermarket Analysis by John Murphy (There's actually 2 books, an older one and a new one. Getting both is useful because they discuss relationships across asset classes in inflationary and deflationary environments, which can be quite different)

- Trader Vic- Methods of A Wall Street Master by Victor Sperandeo (There's also two different books, the other being Trader Vic II. These books do an incredible job of explaining how economics truly work and how the best traders and investors in the world really think about markets and the economy. This differs greatly from what is taught in universities and what is practiced by governments and central banks.)

These three books will give a great and multi-faceted look at how markets really work. After they are read, then books on trading techniques and standard technical analysis can be read, as well as of course trading and sports psychology books.

Hope it helps and best of luck to your son.

Ziad

Brett Steenbarger, Ph.D. said...

Hi,

Thanks, Ziad, for the great response to Jim's question. I'll second your nominations for trading books and would like to encourage other readers to weigh in with their favorites.

I like the Market Wizards books, especially the early volumes, as a practical look at how traders think. A good book on behavioral finance is "Inside the Investors Brain" by Richard Peterson.

Brett

TelespallaBob said...

Very clear and very usefull.

Look forward to read part II.

many thanks.

Joseph said...

Hello Brett. I am a big fan and user of this site. I was hoping you could do a post on fair value. I have been doing some research on the fair value number that CNBC posts. I can not find a uniform formula and the proper data inputs to match the number in my calculations. I have found that various sites about fair value have different formulas, which is also adding to the problem. I would appreciate any insights and assistance into this. Thank you.

Adam said...

I'd like to add to this list of books about trading offering important psychological insights into markets and their participants, Reminiscences of a Stock Operator, by LeFevre.

I strongly recommend the illustrated facsimile edition made directly from the pages of the Saturday Evening Post in which the book first appeared as a series of articles.

This book offers insights on market participants at two distinct levels:

First, those offered by the book's subject, Jesse Livermore, about other traders and the markets.

Second, the insights offered into the personality of this brilliant yet deeply flawed character by reading his own words.

There's no better time to be reading this markets classic than now, and the facsimile edition makes a handsome gift.

"There is nothing like losing for teaching you what not to do. And when you know what not to do, you begin to learn what to do in order to win."
~ Jesse Livermore

Like the rest of us, he sometimes found it impossible to follow his own wisdom.

Adam.

PS: I think a "TraderFeed bookshelf" would be a marvelous idea.

PPS: Most credible ideas about the TICK I first found on Traderfeed, and I've been able to expand upon them and make them work for me in modeling. An essential resource. Thank you, Brett.

abel said...

In the book dept, if one wishes to read a thoroughly insightful, and entertaining tale of early Wall St., I highly recommend 'The Book of Daniel Drew', by Bouck White, which can be found at abebooks.com, if not at your local municiapl or university library.

The book is an account of the life exploits of DD, the tale which begins in about 1812, and carries through for decades beyond.

The value of this tale, one will recognize that the chicanery that has taken place over the past recent decade or two, really has its roots in many of the artifices and devices concocted by DD and his associates, dang nears 160 odd years or more ago, and, as one might expect, is alive and well, (did I hear the name Madoff just now?)

Joshua said...

I get NYSE Tick down to the second using Tradestation. Are you sure the exchanges only update every six seconds?

Josh

mark said...

I look forward to your next series on the NYSE tick and cumulative tick.
Thanks

Jim said...

Thanks to all for the book suggestions!

Jim