Tuesday, March 25, 2008

Using the Dow TICK ($TICKI) to Track Program Trading

A number of readers have asked me recently about tracking program trading. Program trading refers to trades in which stocks are purchased or sold in baskets either for arbitrage or for placing directional bets on sectors, themes, or the broad market. Because the Dow Jones Industrial stocks are among the market's most liquid issues, they are commonly included in baskets by institutional traders. When we see the great majority of Dow issues uptick or downtick simultaneously--giving us extreme high or low Dow TICK ($TICKI) readings--we can infer the presence of program trading. Executing the trades in the shares at the same time creates the sudden rise or drop of $TICKI to very high or low levels.

The top chart shows the first hour of trading in the June ES futures from today's market. The bottom chart shows the one-minute candlesticks for $TICKI, with a 3-minute moving average (blue line) oscillating around the neutral, zero level. The one-minute bars pretty much look like noise, but we can see from the moving average that we started the day with a distinctly negative skew to $TICKI, even as the market rallied in the opening minutes. In other words, programs were selling into the rally.

The blue line stayed mostly below the zero point as the market declined, until buy programs jumped in shortly before 9 AM CT. The market bottomed shortly thereafter and further buy programs led the ES futures higher.

Because program trades can be executed for arbitrage rather than as part of directional bets, not all rises and declines in $TICKI reflect net institutional buying or selling. Hence it's important to see how the TICK for the broad market ($TICK) and price behave when we register $TICKI extremes. It is not uncommon, as in the example above, for shifts in program trading to lead short-term turns in the stock indexes.


Dow TICK and Program Trading