Famous Trader

Buying at the Close is Institutional

An old rule of thumb: volume on the open is retail, volume on the close is institutional.  The idea is that the  dumb money places market on open orders over night.  The smart money (and presumably, the big, institutional money) waits till the end of the day.

I think the first half of the rule no longer  holds entirely true. Mutual funds tend not to trade the open, but other big institutional players do.  Back in the 90s, I was a floor trader at the coffee, sugar, and cocoa exchange (now NYBOT).  In coffee, the managed futures funds didn't trade the open, but the commercials did. (commercials are growers, processors, and distributors, who are actually hedging risk, rather than speculating).  The commercials traded in size, and could not be thought of as dumb money.

Now, lot's of big players trade the open.  This, in no small part is related to obsolescence of the Opening Range Breakout trade in equities.  This system use to work in equities, but for the past few years, we've found that the majority of the range of trade tends to take place at the open.  If you're a short term trade of size, you have to trade the open.  That's where you get the requisite volatility and liquidity to make money.

However, I think the second part of the rule, that volume on the close is institutional still holds true.  The close is when, psychologically, the retail trader is spent.  But the mutual fund traders in particular, are focused on where they are marked to market after the close. This is just anecdotal, but thing should be evident: block trading on the close or otherwise is, by definition, institutional. 

For the past two days, we've seen big buying volume on the close.  Some institutions are betting big that (at least in the short term) the correction has run it's course.

How to beat Google at Search....be Amazon

Great numbers from Amazon last night.  The obvious takeaway is that retail is still strong, although shoppers will be doing more of their shopping on the Web.  But notice that amazon's resurgence is coming on the heals of a dramatic shift in the way amazon does business.  Have you bought anything on Amazon lately?  Much of what Amazon sells is not actually sold by Amazon. Or should I say, it is not actually fulfilled by Amazon.

Amazon "sells" merchandise which is fulfilled by other stores (Amazon calls the "sellers").  Not long ago, I bought a soccer jersey on Amazon (I'm a big AC Milano fan, despite the scandals. Go Rosso e Neri!).  The jersey I got came from WorldSoccerShop.com. World Soccer Shop maintained the inventory.  World Soccer Shop fulfilled my order. 

There's nothing new about this.  Book sellers have been doing this with print advertisements for years. I believe it's called drop shipping.  You present yourself as a store, but really you are just selling someone else's inventory.

What's different about Amazon is that they are now a drop shipping department store.  How many different items does Amazon offer?  It must be thousands.  But Amazon provides an easy way to find what you are looking for.  You either browse their directory links, or you.....here it comes.....SEARCH for the items you want.

That's right, in some senses, Amazon can be thought of as a retail search engine.  Sure, their revenue stream comes from retail margins rather than advertising, but I think the analogy still holds.  You could say that their revenues come from pay per purchase advertising.  They do order tracking and payment processing as well, but I think these should be regarded as artifacts of their niche search business.

I believe that niche search...like Amazon....is the way to challenge Google's search dominance.  Why is Google so dominant?  I really don't know that much about the comparative merits of online advertising programs (Although I intend to learn, since I'd like to earn some ad revenues from this blog. If you don't mind, please click on one of my sponsors).  Does AdSense place text ads on pages that are more likely to drive clicks than other ad programs?  Does google have a better price structure than other ad programs?  Or is it better to place ads on Google simply because Google gets a bigger share of search?

As I said, I don't know the answers to these questions, but I suspect that the latter is the most significant factor.  This begs the question, does Google get a bigger search share because it's better at searching?  Maybe....for generalized searches.  I heard that there was a study done where search results from different engines where re-formatted to look like the other's results (so Yahoo search results were reformatted to look like Google's).  Users were then asked to rank the results of each engine.  As I understand it, they overwhelmingly favored the results that looked like the came from Google, even if those results came from Yahoo or Ask.

This suggests that people prefer Google because they're use to preferring Google.  This sort of dominance through momentum shouldn't be minimized.  It can be sustainable.  Consider VHS v. Beta (if you're old enough to remember).  These two weren't even equivalent.  Beta was empirically better than VHS.  But VHS won, at first because Sony dropped the marketing ball, but ultimately, because VHS gathered irresistible momentum.

So VHS used momentum to defeat the format that competed with it on it's own terms, but ultimately failed when the playing field itself was re-defined.  Right now, the search playing field defines a game of generalized search.  A search engine is a tool that searches for anything on the internet....web pages, blogs, news groups, images, video.....everything.  In this game, I think Google has won.

But the game will change.  As a niche retail search engine, Amazon is simply a better mousetrap.  I know, Google has some kind of Google store, or Google auction, but it's not as pleasant a shopping (or should I say SEARCHING) experience.

The way to be a better search engine than Google is to focus on niche search.  I think it's almost impossibly hard to beat Google at generalized search.  But search engines which focus on a niche can offer a better service.

I think there's more to this, and I'll be posting about it more.