🚀 go-pugleaf

George Leach writes:

> The other angle on all this is just what factors go into making a buy or 
> sell decision?  Are all them quantifiable?  Decision support systems can't 
> emulate some human qualities that go into a decision making process like 
> gut feelings, emotions, etc.......

There are a number of different types of programs.  

One of the major ones is designed to hedge index futures.  Although it 
may not be possible to correctly predict the motion of a securities price
(other than the famous maxim "It will fluctuate" - J.P. Morgan?), the 
relationship between a security's price and the price of an option on 
that security CAN be predicted, in so far as they bear an optimum relation 
to each other (some of the ingredients in the formula are empirically 
derived numbers, thus only known to some error tolerance.).  Thus if the 
option price is too high, RELATIVE TO THE SECURITY PRICE, the option 
should be sold and the security purchased.  Both will go up or down, 
closely paralleling each other, but eventually the option price will
decrease with respect to the security's price.  

Since the S & P index is a good approximation to the market as a whole, such
analyses are often done on the S & P and its index future contract, which 
is traded as a security.  When the program kicks in a "buy stock - sell 
future" message, each of the securities underlying the S & P is purchased 
in its pro-rata quantity.  That can add up to a lot of "buy" orders, 
especially when programs from a number of houses all act nearly simultaneously.

Speed is of the essence, since you have to get the proper prices.  Once all 
the orders come in, supply & demand operates and the prices rise.  The sudden
rise in prices may cause other programs to issue orders...  hence the 
volatility.

This is not the only thing going on, & sorry for the length - just wanted 
to point out that some things CAN be fully quantified (given the right 
assumptions!) in the market.

Dave DeMers, J.D., M.B.A.

{My methods may not be the best, but they had me sell in August...}