The Road Best Travelled

“The only source of knowledge is experience.”
– Albert Einstein


I’m sure our institutions of higher learning may take Einstein to task on his opinion given that they are in the “knowledge” business. If he were alive, he may elaborate on his statement by saying that until an education is put to work, its value is in question.A study by Georgetown University’s Center on Education in the Workforce titled Not All College Degrees are Created Equal seeks to answer that very question. As the study states, “The question, as we slowly dig out from under the wreckage left by the Great Recession, is unavoidable: IS COLLEGE WORTH IT?” While the study answers with a resounding “YES”, it also shows the importance of workplace experience, something colleges and universities seek to provide their students.
Data from the Center’s study in the table below indicate the value of experience, and why “rapid on-boarding” (flattening the learning curve) is a priority for recruiters. Mellon Financial Corporation conducted a study that found the cost of lost productivity due to learning curves somewhere between 1 percent and 2.5 percent of total revenue.

Every new hire faces a learning curve, so ignoring it is ludicrous. The impact of some factors (e.g., employee relocation, corporate environment, co-workers) is difficult to gauge or predict. There are other factors, however, that are more readily managed. A student’s grades and coursework demonstrate their command of their discipline. Their expertise in industry technology displays their mastery of the “tools of the trade”. A thorough interview can reveal an applicant’s knowledge of their prospective field as well as their specific responsibilities. Whatever the case, matching the right person to the right job is no simple task. I’m reminded of a T-shirt I saw that said: “I lied to get this job. They lied about the job. We’re even.” Humorous maybe, but it describes an expensive mistake for both the applicant and the recruiter.

Where does the university fit into the process? In a word: preparation. All that is available to students should be adequately preparing them for the workplace whether it’s curriculum, career centers or facilities. The “purpose” of universities may be knowledge, but their “business” is having that knowledge applied. Those universities that proudly point out their graduate placement are those who understand what their students need to succeed.

Applying These Principles: A Case Study

Among the universities that partner with Trading Technologies, I have seen a number of talented students who made a smooth transition from college to the workplace. I thought it would be interesting to get their feedback on what is special about their schools that helped their market value.

Josh Yomtoob says hands-on experience with X_TRADER®
while attending University of Illinois at Urbana-Champaign
helped him secure a job. He’ll graduate in May.

Josh Yomtoob will graduate from the business school at the University of Illinois at Urbana-Champaign with a Bachelor of Science in Finance with a minor in Computer Science in May 2013. He is in the enviable position of having a job ready for him when he graduates this spring. Josh will begin his career as an energy analyst. Josh took advantage of all that was available to him from his university, so the credit goes to him. But the question is: What was available to him, and what did he think made a difference as he prepared for the workplace?

School Reputation: While it is not necessarily the most important, a school with a great reputation will attract the big companies. That doesn’t mean you have no chance if you go to a school that isn’t a top-ten university. Josh felt a “Top 10” reputation is nice but not necessary. After all it’s what the student does with the education that determines long term success.

Curriculum: Josh felt that the curriculum the school provided was firmly rooted in the textbook, but brought in what he would experience on the job. In many cases, guest lecturers and real-market case studies helped demonstrate how theory is applied. This helped prepare him in applying what he learned to what he would do.

Facilities: Trading labs that replicate the workplace environment and software give students practical and relevant experience with the very tools they will be using on the job. I was happy to hear that our X_TRADER software at the University of Illinois will also be used by Josh when he begins his job this spring.

Corporate Experience: Josh took advantage of opportunities to connect with potential employers. Illinois provided corporate events that he used to learn about companies and build networking contacts. These in turn grew into “job shadow” opportunities and internships. In Josh’s case, it led him to employment. This minimized the mystery for both the student and the company. When all was said and done, each felt they had found a good fit for their needs.

A number of students I have met followed the same path as Josh, so these observations may seem obvious. Yet there are still schools that lack what is necessary to prepare their graduates for employment. But let’s not saddle the university with all the blame. In many cases, students begin their quest for employment in senior year, which, in my opinion, is three years too late. I never enjoyed the interview question, “Where do you see yourself in five years?” but it accurately reflects how students should approach their education. If they desire employment after college, they should begin by understanding where they want to be, what they need to get there and the school that will provide it.

Watch Episode 3 of Our ADL™ Hangout Series on Wednesday, January 30th

UPDATE: If you missed our live broadcast of this ADL Hangout, you can view the recording here.

The next Google Hangout featuring our ADL algorithmic trading tool is set for Wednesday, January 30th, at 3:30p.m. CST. Product Manager John Yoo and Senior Business Analyst Tom Zagara will use the If-Then-Else block to build advanced logic for the exit-side order of the scalper algorithm featured in our previous Hangouts.

To watch our live broadcast, visit TradingTechTV at 3:30 p.m. CST on Wednesday. No registration, login or special software is required.

If you missed the first two live Hangouts, you can watch the recordings below.

Episode 1: Build and launch a basic scalper algo. It joins
and maintains a one-lot bid on a given instrument as long
as the bid quantity is greater than 100. When filled, it places
an exit order at one tick higher than the fill price.


Episode 2: Build the exit-side logic to the
scalper algorithm introduced in the first episode. 
In doing so, we also cover the Value Extractor 
Block and the concept of “virtualization”.

A Leading Technical Indicator for Charting in X_STUDY®: TT CVD®

X_STUDY charts offer more than traditional bar data. Along with the open, high, low, close and volume for each bar, X_STUDY provides additional data points, like the total number of market sellers hitting the bid, or bid volume, and the total number of market buyers lifting the offer, or ask volume. As explained in my last blog, these bars can be time-based or volume-based.

Today I’d like to talk about TT CVD, a true leading technical indicator that works off these powerful market data points.

You might be thinking: “All technical indicators are lagging indicators.” But after you see how TT CVD is calculated, you will probably agree that this is a leading indicator. It can complement just about any trading strategy, too.

TT CVD Overview

TT CVD uses the bid and ask volume data to display the running difference of the ask volume (the market buying pressure) minus the bid volume (the market selling pressure)—or, in short, the cumulative volume delta (CVD). Let’s walk through a real-world example to illustrate how TT CVD is calculated.Figure 1 below shows a chart of the December E-mini S&P 500 contract with three studies. The first, Volume Delta—Histogram, displays the total bid and ask volumes. The second, Volume Delta, displays the difference of the ask volume minus the bid volume. These two studies will help me explain the third study, TT CVD.

Figure 1: One-Minute December E-mini S&P 500 Chart

In the opening one-minute period, 7,254 contracts are bought on the ask and 5,940 contracts are sold on the bid. There is a net market volume change, or volume delta, of +1,314 (7,254 minus 5,940). Since this is the beginning of the session and TT CVD is configured to reset at the beginning of a session, its value is simply the volume delta for this opening bar of +1,314.

Moving on to the next minute, in Figure 2 below, we see 2,111 contracts are bought on the ask and 3,444 contracts are sold on the bid. The volume delta is going to be negative here, since there were more market sellers than market buyers. The volume delta equals -1,333 for the second one-minute period of the day (2,111 minus 3,444).
Figure 2: One-Minute December E-mini S&P 500 Chart

TT CVD for the second bar is equal to the previous bar’s TT CVD value plus the volume delta. Continuing with our example, the previous bar’s TT CVD is +1,314, and the second bar’s volume delta is -1,333. Therefore, TT CVD equals -19 (1,314 minus 1,333). TT CVD continues to cumulate the volume delta for the remainder of the session and is a clear measurement for market order flow.

TT CVD and Daily Net Change

Now that we’ve explained how TT CVD is calculated, let’s compare the same setup for this study to the daily net change. TT CVD values trend similarly to the actual price data, since net market buying and selling should have a direct and correlated impact on the price. The larger the magnitude of TT CVD value, the greater the net change should be for the day.

Figure 3 below shows several days, with each day outlined and a net change value labeled. I used last traded price for each day, not the settle. For most days, if TT CVD is positive, so is the net change for the day. Likewise, if TT CVD is negative, so is the net change for the day. Sampling the last 90 trading days for this contract will show this statement is true for 67 days, or 74 percent of the time.

Figure 3: 60-Minute December E-mini S&P 500 Chart

The remaining 23 days sampled will be similar to December 4 and 5 in Figure 3. These days are generally neutral days with sideways action. The net change and TT CVD values are both near unchanged.This is one of the main reasons why the two values sometimes don’t line up with one another.

Now that you’ve seen how TT CVD works off more powerful market data points than just the open, high, low and close, I hope you agree that it is a true leading technical indicator. If you aren’t already using TT CVD, take the next step and add TT CVD to your X_STUDY charts so you can observe this leading technical indicator work in real time. And if you aren’t already using X_STUDY, what are you waiting for? It’s included free with all X_TRADER licenses. Learn more about X_STUDY here.

My next blog will look at another influential market data point that’s included in X_STUDY. Until then, plan the trade and trade the plan.

Brazil in 2013: Where There’s Smoke, There’s Fire

The country of Brazil derives its name from the Portuguese word for the trees that once grew up and down its coast. In the 16th century, the timber from these trees was the first main export to Europe from what was then known as Terra da Santa Cruz (“The Land of the Holy Cross”). The wood from these trees produced a deep red dye, resulting in a name derived from the Latin word “brasa”, meaning “ember”. Over time, European merchants began to use the colloquial term for the county and its most valuable commodity: “Brasil” or “red like an ember”.

Red like an ember is a good way to describe Brazil’s economy these days. As one of the world’s fastest growing economies in 2010, the Brazilian economy was white-hot. In 2011 and 2012 though, the economy slowed to a low simmer as growth slowed substantially. In 2012, the stimulative policy changes put in place by the Brazilian government and central bank resulted in a record volume year at BM&FBOVESPA, as well as a number of compelling trading and investment opportunities.

Big Year for BM&FBOVESPA

November 25, 2012 marked the one-year anniversary of TT providing native market access to BM&FBOVESPA, which coincided with the exchange’s migration of the last of their futures products to the new PUMA matching engine. While the last year has been a challenging one for the Brazilian economy in general, the country is still expected to set the pace for growth in Latin America going forward. At the same time, the exchange continues to focus on product innovation and expanding their offering for both local and foreign investors.

In a year that saw volumes declining at most major futures exchanges around the world, BM&FBOVESPA’s volumes are actually up. Through the first nine months of the year, the exchange’s futures volumes were up 5% over the same period a year earlier. The increase in volume can be traced back to two things: uncertainty in the Brazilian interest rate markets, and BM&FBOVESPA’s technology and product launch initiatives.

On the technology front, the PUMA matching engine, developed jointly with the CME Group, was built with high-frequency traders in mind. It shaved the time the matching engine takes to process a trade from 10 milliseconds to less than one. In 2013, BM&FBOVESPA will move their equities onto this platform as well.

Product-wise, this past summer, the exchange listed eight new FX contracts, including mini-dollar and mini-euro products. In June, the exchange also began cross-listing contracts with the CME Group, launching a mini-soybean product that settles to the price of the same product on the CBOT. And in October, BM&FBOVESPA similarly launched a product based on the CME’s S&P 500 future. As these markets develop in Brazil, they may offer interesting spreading opportunities against similar products in Chicago.

“North-to-South” Access

While it is still a somewhat cumbersome process for foreign investors to trade on BM&FBOVESPA, even here, both the exchange and the Brazilian government are slowly greasing the wheels. Trading by foreign participants is expected to comprise 25% of total volume this year, versus 16% in 2011.

Connectivity into São Paulo has long been costly, but slowly prices are starting to come down as more and more “north-to-south” customers enter the market. Increasingly, extranet and hosting providers, such as TTNET, are setting up shop in Brazil, making it easier and more cost-effective for the global community to access Brazil.

The Brazilian government is doing its part as well to entice foreign capital. Long fearful of inflation, Brasília put in place capital controls, such as the 6% IOF tax on inflows of foreign capital for the trading purposes, to tamp down appreciation of the Brazilian real (R$) against the U.S. dollar. As fears of a strengthening real turn into fears of a weakening currency, the government is slowly eliminating some of these controls. Last December, the IOF tax on equities trading by foreign participants was dropped, and in early December, the number of foreign loans to Brazilian firms subject to the IOF tax was reduced. While the 6% tax on foreign capital inflows related to some derivatives trading remains in place, the government will likely look to remove that, too, as long as the real continues to look weak.

Information regarding how foreign investors can access BM&FBOVESPA is available on the exchange’s website here.

Looking Ahead to 2013

Somewhat turbulent economic times in Brazil have also played a part in the uptick in the exchange’s volume in 2012. In years past, with the Brazilian benchmark Selic interest rates hovering between 10% and 20%, the carry trade has been a popular one on BM&FBOVESPA.

That has changed somewhat in the last year, though. The Brazilian economy, which grew at a 7.5% clip in 2010, will slow to about 1.5% this year. Not bad when you compare it to Japan, the U.S. and Europe, but meager by BRIC standards. In an effort to get the economy back on track, the Banco Central do Brasil has cut interest rates from 12.5% in mid-2011 to just 7.25% as of October. It was the resulting uncertainty and volatility in the interest-rate markets that led the exchange to a record volume month in May of 2012.

Low interest rates coupled with low inflation (for now) offer a number of interesting trading opportunities going forward. For local Brazilians, they can no longer ensure themselves a healthy rate of return just by sticking their cash in a savings account. For the first time in a long time, Brazilians are looking to invest in their country’s stock market. As the CEO of BM&FBOVESPA, Edemir Pinto, told the Financial Times, “For any stock exchange, high interest rates are the biggest competitor you can have so this is a big moment of great transformation for the Brazilian market.” Traders who want to gain exposure to Brazilian equities can do so via the Ibovespa index futures on BM&FBOVESPA, which track the total return of the most liquid stocks on the Brazilian stock market.

Further Selic movements by the central bank also offer opportunities for traders looking to trade the DI interest rate swap curve. With an election looming in October of 2014, President Dilma Rousseff’s government will look to get GDP growth back on track. Earlier this year, she announced a stimulus plan consisting of 955 billion reais worth of infrastructure projects. These projects, coupled with other construction related to the 2014 World Cup and the 2016 Olympics, will lead to the issuance of debt that will likely have to be hedged in the futures market.

Still, that stimulus package might not be enough. Economists had projected GDP growth north of 4% in 2013, but lately they have been revising those forecasts downwards. So, the near term question is whether the Rousseff government will continue to cut rates in an attempt to jumpstart the economy, or whether the central bank will turn its attention to preventing inflation and a further weakening of the real and will, as a result, raise rates back into the double digits.

It’s going to be an interesting new year in Brazil, with the BM&FBOVESPA futures markets offering plenty of opportunities for new and unique trading strategies for foreign investors. The embers of an emerging powerhouse economy are still there smoldering, and it’s just a question of whether the Brazilian government can find the right policies to stoke the flames.