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The Difference Between Night and Day
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The Difference Between Night and Day

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The Difference Between Night and Day

All one has to do is to look at a recent chart of the ES, to see the disparity between the direction in the price of ES in the RTH session versus the ETH session. In fact, the correlation between overnight and subsequent daytime changes is app. -7.2%. Between daytime and subsequent overnight changes it is -7.7%.

In a follow-up to a very interesting post from Brett Steenbarger's Traderfeed, MarkerSci Blog came up with the following statistics:

From 1993 to 06/2008, the bullish trend over these 15 years has been the result of the overnight market, while even during the irrational exuberance of the late 90’s, the daytime market has been timidly flat. Additionally, the overnight market has been the more bear-resistant of the two and exhibited only about half of the volatility.

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And in another study which took place between 1998 and 09/26/2008, Cliff, Cooper, and Gulen stated, "We document the striking result that the US equity premium over the last decade is solely due to overnight returns; the returns during the night are strongly positive, and returns during the day are close to zero and sometimes negative."

They reasoned that to some extent, positive overnight returns were attributable to an illiquidity premium, but found it counterintuitive that daytime returns suggested a zero or negative risk premium during trading hours when the threat of headline risk and volatility was greater.

At least for the period from 1993 -2008 bullish moves have taken place during the ETH session while the bears enjoyed a home field advantage during the RTH session Over that same time period daytime volatility had been on average 70% greater than at night.

However, since 2008, when both of these studies ended their research, market performance has changed. In a recent article from Bespoke Investment Group, they reported, The performance of the ETF during the after hours has really taken a hit recently, while the "open to close" strategy has actually gotten better.

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In addition, the size of daytime moves, relative to nighttime moves is diminishing.

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Th shift from positive ETH/negative RTH performance to positive RTH/negative ETH performance may of course be due to the sovereign debt risk that hangs over the Euro-zone's collective heads. Or it may be a result of institutional manipulation, i.e., run the futures up at night, distribute stock during the day, or sell the futures off at night, and accumulate stock during the day.

Whatever the reason(s) may be for the day and night effect, what is important, is to recognize that the rules of the game have changed and the new rules carry implications for alert traders. By observing the correlations between ETH/ETH sessions, the negative correlations between ETH/RTH sessions, and various price patterns and tendencies, we may be able to develop profitable strategies.

Chart 1 shows the the recent break from~1190.00 -~1090.00. The first 3 days of the down move, the market was run up during the ETH session and then liquidity was pulled during the RTH session, and the market sold off. The next 2 days they sold the market off at night and sold it off during the day. Please note that with all five RTH sessions, the fib extension from the previous RTH session high/low to the next RTH session's opening are all about the same. Also, note that in each case there was a strong opening and a weak close.

Chart 2 shows the rally 2 weeks ago from ~1120.00 -1215.00. this move higher was marked by almost identical ETH sessions followed by identical RTH that mirrored it's night time counterpart. They sold off the market at night, rallied it early morning, strong first hour followed by a break to the 23.60-38.20 fib extension, and then a ramp higher and a close above the opening range.

Rinse and repeat. It's as easy as washing your hair.





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The Difference Between Night and Day-es-12-11-60-min-10_3_2011-sell.jpg   The Difference Between Night and Day-es-12-11-60-min-9_22_2011.jpg   The Difference Between Night and Day-lh.png  

Last edited by tigertrader; October 4th, 2011 at 01:07 AM.
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  #3 (permalink)
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Yes, illiquid markets move more.

The ES is less liquid overnight and displays the characteristics of a less liquid market at that time.

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When this was previously discussed, the conclusion was that basically in a bull market you want to buy the close sell the open, and in a bear market sell the close buy the open --- in both cases, flat the cash session and in a position overnight.

Mike

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When this was previously discussed, the conclusion was that basically in a bull market you want to buy the close sell the open, and in a bear market sell the close buy the open --- in both cases, flat the cash session and in a position overnight.

Mike

BTW, do you think that it is any coincidence the way the margin system works that people are incentivized to hold only during cash session?

Clearly the people setting the margins know of this type of research. The banks and such are who write the regulations and laws, and influence the setting of the margins. So obviously it is to their advantage to encourage people to minimize trading when it is most profitable, and maximize trading when it is least profitable.

Mike

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Big Mike View Post
BTW, do you think that it is any coincidence the way the margin system works that people are incentivized to hold only during cash session?

Clearly the people setting the margins know of this type of research. The banks and such are who write the regulations and laws, and influence the setting of the margins. So obviously it is to their advantage to encourage people to minimize trading when it is most profitable, and maximize trading when it is least profitable.

Mike


It's not really that in my opinion.

The S&P follows the Asian/European markets during the Globex session just as it tracks the S&P500 in the daytime. Some of the largest moves put in overnight are on the least volume.

I trade it sometimes - I'm usually up at 6am BKK which is 7pm EST, you see some huge moves but if this was all about 'them' making money, then 'they' would be doing do with a lot move volume.

The DOM is normally in the 1000's per level on the ES in the daytime. Overnight it is often well below 100 at each level. As such it just moves a lot more. Still - it's moving on tiny amounts of volume, certainly during the Asian morning sessions.

the US is not the centre of the earth. A lot more traders come in when London (at to some extent Germany) come on line and it thickens up but still not to even a half of what we see at the NY open.

With such a lack of liquidity, the moves are bound to be large. In face, if it weren't this way, then we should be asking questions as to why not. We don't ask why the CL puts in large moves or why the ZF puts in tiny moves.

Now - if the markets were thick overnight, you'd probably have the same margin requirements. Chicken & Egg...

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I used to use a RTH chart only for certain instruments, mainly because it made my chart look bad when I added the ETH session. But finally I learned that I just needed to use a different kind of chart --- for instance, a volume chart --- which is consistent regardless of time of day.

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Big Mike View Post
BTW, do you think that it is any coincidence the way the margin system works that people are incentivized to hold only during cash session?

Clearly the people setting the margins know of this type of research. The banks and such are who write the regulations and laws, and influence the setting of the margins. So obviously it is to their advantage to encourage people to minimize trading when it is most profitable, and maximize trading when it is least profitable.

Mike

But Mike the overnight margins on the CME are not really 'overnight', they only apply for the hour or so (depending on what instrument) that the CME electronic exchange is closed.

So with the ES (and I am going from memory here) the cash market closes 4.0pm ET and the electronic market at 4.15pm ET. The electronic market opens again at either 5pm or 5.15pm.

So you could still apply the 'sell the close' or 'buy the close' strategy by just deferring that transaction until 5pm when the electronic market re-opens and you then avoid the 'overnight' margins.

Not perfect, but pretty close.

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steve2222 View Post
So with the ES (and I am going from memory here) the cash market closes 4.0pm ET and the electronic market at 4.15pm ET. The electronic market opens again at either 5pm or 5.15pm.

FTR, the ETH session opens at 4:30ET and closes 4:15ET. The daily maintenance shutdown is from 5:30 to 6:00, but that's within the "trading day" hours of 4:30 to 4:15.

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Big Mike View Post
BTW, do you think that it is any coincidence the way the margin system works that people are incentivized to hold only during cash session?

Clearly the people setting the margins know of this type of research. The banks and such are who write the regulations and laws, and influence the setting of the margins. So obviously it is to their advantage to encourage people to minimize trading when it is most profitable, and maximize trading when it is least profitable.

Mike

you are confusing intraday margins (set by FCM) with margin requirements set by the Exchange... for example, ES.. the CME min margin requirements are $5000 to Open and $4000 for maintenance... that applies to overnight and cash session(which is nothing more than the hours during which the primary markets for the derivative are open - in this case the stock market) ... however, an FCM is able and willing to "extend" better leverage to you and offer anywhere from $400-$2000 margin for ES during cash session only, and then switch to standard maintenance for overnight .. so those creating the "incentive" are the FCM's... and not all of them first of all, but mainly those that want to attract small accounts...

can you imagine if there was no $500 day margin for ES from lots of different FCM's? then anyone looking to get into Futures would have to have at the very least $10K to trade, vs. the $1000-5000 that many (the FCMs) ask for now... it goes to why there are so many people that shouldnt be doing anything with futures, trading futures today...

Performance Bonds | Margins Requirements for CME Group Products

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