Daily Speculations
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James Sogi
Philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family. |
8/2/2005
Structural Analysis, by James Sogi
Market analysis has been categorized as either fundamental or technical. I propose a new school of market analysis: Structural Analysis. Structural Analysis looks to the mechanical and legal structures of the markets and the structures of those trading the markets to interpret how and why price action, volume and various derivatives thereof change as they do. Straight forward examples of structural interpretation would be:
- The ratcheting action of the market caused by the market making functions, both in the NYSE specialists corner, and in the Globex market computer algorithms restraining the market to inside market transactions (for the most part) and the orderly transitions form one price level to the next as a auction structure.
- Gaps caused by the formal market closing and opening at fixed times.
- Market stopping rules and other structure rules of the exchanges that affect markets.
- The transition from fractions to decimalization and attendant results on markets, such as reduced volatility due to increased continuity and smaller step size.
- Daily patterns of pit traders, hedge funds, mutual funds, day traders and their internal policies for entering and exiting positions.
- Seasonal and tax and accounting risks, requirements of hedgers, speculators, pensions which may affect market positions of these participants.
- Currency hedging requirements of large cap international companies.
- Financing/political structures of G7 and lesser nations such as their central banks,a nd relations to political mechanisms.
- Commodity hedging requirements of farmers, nations, oils companies.
- Behavioral finance studying psychological structures of market participants. Price is imaginary, as is money, and not determined by strict causal and mathematical functions, but rather by fluid mental processes for which there are structural models.
- International currency structures. i.e. breakdown of gold standard, Bretton Woods, floating yuan, EU constitution approvals. Artificial trade barriers, tariffs, trade wars, deficits, interest rate adjustments.
Each of the above provides an artificial causal effect on the markets caused by major structures both legal and mechanical or psychological, which if understood, can lead to advantages over those looking the other way or understanding of what the market tends to do over time. Of course, as should go without saying, testing required, but this provides good ideas for model building. Before lawyers go to any court, we carefully read all the rules of that court, and the local rules, to understand how they may affect the case, and often determine the outcome irrespective of the merits. This is the distinction between a substantive ruling on the merits of the case or a procedural result. Same for the markets: know the rules, all of them. Know the operations of the opponents, how they operate, why they do what they do. Avoid being blindsided. Use the rules to your advantage over the opponent who may be looking at lines on a chart.
Adi Schnytzer adds;
There's a whole subject called microstructure that deals with much of this already. Two examples of texts:
Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris
Market Microstructure Theory, by Maureen O'Hara
Behavioral finance is also well known and dealt with elsewhere.
c
Jim Sogi, May 2005
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