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11/11/2005
Antipredator Behavior, by Victor Niederhoffer

The moves of the market are designed by an invisible hand to foster the continued survival of the market itself. If such were not the case, then moves that would lead to its death or grave decline might occur. One example is the disruptive rally that occurred in silver and gold in 1980, after which rules were promulgated that allowed for liquidation only in the silver contracts. Such rules were good enough to stop a squeeze. But they also served to reduce volume and the price of seats by an average of 90% from the pre-rule level, over the next 10 or 15 years.

The unprecedented run of four trading days from November 3  to November 9,  where not one close to close move was more than one point in S&P and the total change over the 4 days was exactly unchanged, is not consistent with maintenance of all the feeding relations among the major market groups and niches, as it would lead to a cessation of the frictional trading which is so necessary to provide an offset to the massive fixed costs of maintaining the system.

They play a similar role to the feigning of death that often occurs in the animal world. A good example, covered in books such as Perspectives on Animal Behavior by Judith Goodenough, is the feigning of death by birds such as the killdeer when a predator is spotted. The parent flies away from the nest, dragging its wing, luring the predator away from the nest. Then, as the parent is about to be attacked, it suddenly becomes energized and flies away.

Snakes are excellent at feigning death, secreting death fluids, writhing, and finally rolling belly up with open mouth and tongue wagging, but the classic example is the possum, which secretes death-like fluids, rolls up and wags its tongue. If such death-like displays don't work, many animals have a final escape act involving startling behavior. Insects display many of these behavior patterns when threatened, suddenly showing bold colors, enlarging body parts, secreting vile liquids, and making loud sounds. And we are all familiar with the curling up and erecting of fur of the cat when a dog is ready to attack.

The S&P futures on Thursday showed this startling behavior, with a range of 18 points from a low of 1217 to a high of 1235, and a net change of 10 points, its largest range since similar moves on October 28. The question emerges: do these startling behaviors lead to escape? We cannot answer such a question for the animal species without a controlled study of the kind reported in the literature, e.g. the response of a feral cat to simultaneous presentation of automatized tails (either thrashing or exhausted) and live tailless bodies of two species of lizards . But we can report what happens in the market after a series of very small days followed by a large rise . In a typical study we find a 0.5% average rise a few days later with a batting average considerably higher than the first place baseball teams'. Apparently in the case of the market the startling behavior is on average successful, a success perhaps hastened by the revulsion of the doomsdayists to give up the ghost.

Mike Desaulniers Adds:

In keeping with the animal theme, I might mention Rene ("Le Crocodil") LaCoste's feigning death after being hit by an opponent's passing shot.

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