Being a big-time University of Michigan sports fan can create conflicts in your life. For example, it severely limits the colors in my wardrobe as I do not want to resemble in anyway whatsoever, or promote the colors of any of my hated rivals. Also, it can be a factor when handicapping other sporting events I closely follow such as the Kentucky Derby.
So you may be asking how does my allegiance to Michigan sports create a conflict for me in handicapping the Kentucky Derby? Let me explain. In the past, I have favored the winner of the Santa Anita Derby (especially if he is a long shot) as my choice for the Kentucky Derby. And this year’s winner, Goldencents, is partially owned by none other than Rick Pitino, who just recently led his Louisville Cardinals to a hard fought victory over my Michigan Wolverines in this year’s NCAA Basketball Championship Finals. So, do I sit out this year’s Derby and cheer for every other horse in the race? Or do I put my biases aside and rely on my handicapping skills?
Let’s examine the top contenders along with Goldencents to determine the appropriate betting strategy for the first leg of the Triple Crown. More times than not, a winner from one of the major prep races before the Derby (Wood Memorial, Arkansas Derby, Florida Derby and Santa Anita Derby) will be the eventual winner.
The only horse entering the race with a perfect record is the winner of the Wood Memorial, Verrazano. Being hailed as perhaps the next super-horse, the colt may go as the favorite. In addition to his victory in the Wood Memorial, Verrazano galloped to victory by 3, 16 and 8 lengths in his three previous starts. Veteran trainer Todd Pletcher (trainer of 2011 Derby winner Super Saver), will have the colt and jockey well prepared for the longer distance and large field. However, being the favorite in the Derby is not always a good omen, as the chalk rarely wins the race. In fact, going back to 1979 only five favorites have gone on to win the Kentucky Derby. With that being said, I will use him in some combinations with some other long shots.
One of the four other stablemates of Verrazano, Overanalyze, was the winner of the Arkansas Derby. Although he coasted to over a four length victory, very slow fractions on the front-end allowed him to do so. In the 21 horse stampede at the Derby, it certainly will not be nearly as easy to weave and bob from way back in the pack and coast to victory. The eventual winner will need to be in striking distance by the half and ready to mount a challenge. Also, his past performance reveals a pattern of losing a race following each of his four victories. Since his last race was a win in the Arkansas Derby, I am predicting the pattern to hold true to form. Once again, I may use him as a candidate for some combinations.
Orb, the winner of the Florida Derby, is the other candidate to go off as the favorite. He has dominated the horses at Gulfstream Park over his last three starts, coupled with his four wide move in the stretch to win the Florida Derby by almost three lengths is impressive. Once again, he was aided by slow fractions on the front-end and had plenty of kick to make his stretch run. More importantly, he has the most outside post (16) of all the major contenders and will have to expend some energy to get in good position for a final move. This stands in stark contrast to his usual come from behind style. Finally, being one of the potential favorites makes him a less attractive horse to wager on.
So where does over-analysis leave me? With the Santa Anita Derby winner and partially Rick Pitino owned Goldencents. After reviewing his race in the Santa Anita, his jockey was able to call on his horse for a move a few times, before heading home for a strong run in the stretch. With the Kentucky Derby being a long and grueling race, especially with a large field, the winner will need to be near the front end of the race and then have enough kick to make a stretch run. If Goldencents can get a similar trip to his mount in the Santa Anita Derby, he may be the next candidate to win the first Triple Crown since Affirmed in 1978.
Doug Clark, managing director of liquidity research for ITG Canada, was recently interviewed on TabbFORUM in a post called “Dark Pools & Private Schools”. In his interview, Clark questions Canadian regulators for their recent regulation of dark pools. He compares the restrictions placed on dark pools to prohibiting parents from sending their kids to private school.
But his analogy is flawed.
In his analogy, the parents are the ones choosing to take their kids out of the public school sector, to place them into the private school sector. But in many cases the retail investor is NOT the one choosing to send their orders to a dark pool. In some cases, they don’t even have a choice. It is often the broker/dealer controlling the routing, and making that choice for them (usually based on the payments they receive from routing their orders to a specific OTC market maker or dark pool). Following Mr. Clark’s analogy, this would be equivalent to the education authority taking kids out of public schools and placing them into private schools without the parent having any say, and getting paid to do it!
Secondly, the reason the parent would move their child from a public school system to a private school system is to receive some sort of benefit – better food, better teacher to student ratio, better security, better programs, as Mr. Clark mentions in his interview. But what is the benefit that the customer is receiving by having their order routed away from the public exchange? The chance to receive sub-penny price improvement on their order? These fractions of a cent give little nominal value to the customer, but have a significant effect on deterring displayed liquidity, especially in thinly traded issues.
Consider the following example.
Assume stock XYZ has NBBO:
Bid Size Ask Size
25.50 500 25.70 500
A retail investor places a market order to buy 500 shares of the stock. The order is routed to an OTC market maker who gives sub-penny price improvement to the order, and executes the buy order at 25.6999.
Instead of paying $12,850 for the stock, the retail investor pays $12,849.95 for the stock, saving a whopping nickel.
But the participant who placed the 25.70 limit order on the exchange, the displayed liquidity provider, is left unfilled.
Imagine if you were that participant that should have received an execution, but did not because your order was stepped in front of at the moment it was about to be executed. This leaves you with an unquantifiable loss, the loss of the missed trading opportunity.
Now imagine a different scenario:
Assume the same NBBO:
Bid Size Ask Size
25.50 500 25.70 500
A retail investor places a market order to buy 5000 shares of the stock. The OTC market maker, knowing this order will impact the price significantly, does NOT step in front of the 25.70 order, and allows the market order to route to the displayed market, taking out the 25.70 seller, and trading all the way up to 26.00 to fill the balance of the order.
The 25.70 limit order trader is immediately down 30 cents on the trade.
The routing of retail order flow away from the displayed market has distorted the risk-return matrix of displayed market makers, and they are hesitant to make markets in smaller stocks as a result of the increased adverse selection risk.
In fact, the matrix has become so distorted that our firm, Bright Trading LLC, recommended to our traders that they stop providing liquidity in small and mid cap stocks entirely. The rationale is simple, if you get filled on your limit order, it is usually because you are on the wrong side of the trade, and the price often blows right through you.
Therefore, there is little point to displaying liquidity in these issues, as the return no longer justifies the risk. Our traders have learned this the hard way. The OTC market maker steps in front of your order when it is on the right side of the trade, and allows your order to be filled when it is on the wrong side of the trade.
We believe that the distortion of the risk-return matrix of displayed market makers due to internalization, is the main reason that we have liquidity problems in the small and mid cap space. It is apparent that the Canadian regulator (and now ASIC) have similar concerns.
To rectify the situation, the Canadian and Australian regulator have mandated that orders routed away from the public exchanges receive meaningful price improvement over the NBBO. That way at least there is some benefit to the end customer from the routing of their orders away from the public exchange. It should also help to deter OTC market makers from stepping in front of limit orders, as they now have to assume increased risk (by giving meaningful price improvement) when internalizing a retail market order.
But ASIC may go further. In their recent report on dark liquidity, not only are they mandating meaningful price improvement, but they are also proposing a trigger to implement a minimum dark order threshold, to apply to securities where there is evidence that dark liquidity has caused degradation in market quality.
These actions by the Canadian and Australian regulator should be applauded as opposed to questioned. Displayed limit orders are the building blocks of price discovery. It is imperative that we protect these orders. The new policy decisions of the Canadian and Australian regulator should help to improve the risk-return matrix of displayed market makers and encourage market participants to display limit orders more aggressively, which should improve market quality in these countries.
What a choppy week. The Cyprus banking crisis rocked the market early Monday morning, knocking the S&P futures down to a low of 1529.50. But the bulls quickly regained control, as the market rallied back to close strong. Tuesday saw a quiet morning, followed by a wicked selloff in the afternoon as more concerns materialized in the Cyprus situation. We again found support in the low 1530s, putting in a potential double bottom. We had a strong rally on Wednesday (despite poor earnings from FDX), but then an earnings warning from ORCL Wednesday evening, led to a bit of a Tech-wreck and the market closed weak again on Thursday. So where does the market go from here?
From a technical perspective, the trading levels are shaping up nicely. Key support and key resistance is well defined. The market continues to struggle in the 1550 area, as traders have been using rallies into that area to lighten their positions. The market found support in the 1530 area on Monday and Tuesday, and that area should provide some initial support again. But trading action in the individual stocks is a little more concerning.
The market appears to be shifting to a “risk-off” trade, as the financials and cyclicals are starting to show weakness, while defensive names continue to be strong. Money is moving into the gold miners as ABX, GG, and NEM are starting to break out after forming some nice bases.
Bottom line, it is critical that this market hold the 1529.50 low that we set on Monday. If that level is breached, we could be in store for another test of 1500.
Here are the support and resistance levels to focus on:
|1558.75||*******||High of move|
|1519.75||*****||March 3 low|
The doctor has written the right prescription for an increase in the price of WAG stock. In addition to announcing better than expected earnings by $.02 (.96 vs. 94), the company announced a 10-year pharmaceutical distribution deal with ABC.
After trading up modestly in the pre-market, WAG opened at 43.22 and never looked back. The stock roasted shorts, as it blew through the 43, 44, and much of the 45 handle in early trade. WAG exceeded the June 2011 high of 45.34 and traded as high as 45.80 before some real profit taking stemmed the tide.
So what now for WAG, after this very unusual move for this normally mild-mannered issue?
First of all, the 45.80 high from today may provide some initial resistance, as investors who chased today’s early rally, may be targeting an exit point at that level. Above that, traders will need to reference back to the September 2007 high for the next possible resistance point at 48.09. For now, the small gap between today’s low (43.20) and Monday’s high (42.71) may be laden with large bids as bloodied long-term shorts and bruised short-term players attempt to wiggle out of their positions.
Here are the key levels to focus on for tomorrow:
|48.09||******||September 2007 high|
|44.74||CLOSE||Key swing level for Wednesday|
|42.71-43.10||******||Monday high/Tuesday low|
Since catapulting almost nine points from the beginning of the year, the PG chart is starting to look “tired”. After making an all time high at 77.76, one or several major institutions have targeted the 77.50 level as an exit point. Every time the stock approaches that level, it is met with major resistance.
The buyers are becoming exhausted with their attempts to take out the 77.50 level, and the stock has slumped over a point in the past two trading sessions. Investors should take note of today’s low, as well as the 75.56 low on March 1st. If that area is breached, PG could easily trade down to the 75 level which could induce a much deeper correction.
Here are the key levels to focus on:
|77.38-.49||*************||7 of the last 10 highs|
|75.56||******||March 1 low|
|75.12||**||February 11 low|