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Forum On The Tools And Philosophy Of, Peter F. Way And His Usage Of Market Maker's Hedging Strategies

Philosophy and Use of Tools



Disclaimer: There are examples below of BlockDesk tools provided to me by them at my request as I was preparing this Blog. Any Tool so displayed without explicit reference to any source was so provided or obtained with the help of

This Blog represents my opinions and research about my experiences with this investing philosophy while Beta Testing and does not necessarily represent the views and explicit ideas of either Peter F. Way, or the website They did assist me by providing certain tools and pointed me to many references to publicly available information. Still, the opinions and conclusions expressed are my own and those of the contributing posters.

ADDITIONAL Disclaimer: I have no financial interest in I am an independent retail investor who may trade any stock at any time without notice. I do Beta Test the tools at, and have established my opinions from Data obtained from them; but I do my studies independently and at times my opinions may differ from those of Any opinions published here are my own. I try to maintain the highest standards of research possible without outside influence.

As is now open for purchases of Data by the Retail Investor, I am more limited now in the obtaining and release of certain "current" data in order to abide by the TOC. Retail Investors are encouraged to browse their site as some data is still Free, and what products they are selling may change without prior notice to me.

Some of the following data was provided to me without charge while the site was Testing. Certain products I have purchased and am sharing with the reader for their benefit. I am not a Financial Advisor, nor should the reader assume that my opinions have any greater intrinsic value than their own.

My Opinions:


Peter F. Way has written many articles on "Seeking Alpha" and elsewhere about a different philosophy of investing, which is far different from "Buy and Hold" or even "Market Timing". Instead, he follows Market Makers hedging activities in order to mitigate the risk they assume when investing money into stocks that they have to buy and sell to provide liquidity for their clients. This means having to find (often), a number of other buyers or sellers to accumulate or dispose of enough shares to complete their client's transactions. This means that they often have to put their own money "At Risk" in the process. The basic intent at the trading desk at a Market Maker is to keep the firm's net posture on each stock flat (neither net long nor short) and minimize the firm's end-of-day capital sequestration (aka "haircut") and Risk. To maintain this posture, they need to hedge those positions. This involves interactions with other MMs, who will sell or buy hedging insurance. The proprietary method that Peter has developed follows these hedging activities in order to discern the opinions of the very well informed traders at these institutions. These Market Makers most often have access to information before it is available to the "Retail Investor"(if ever available). At times this information is never available to the public, such as "Client investment strategies".

This new investment philosophy requires somewhat more time and activity in investing than "Buy and Hold"; but has the potential (in my opinion) for far greater rewards than even most "Active Traders" attain. It means that one sets definite Price Targets or Time Targets (63 Trading days) at which point a position is closed. The "Annualized Return" displayed is based upon that provides a "Head-to-Head" comparison between stocks. You might consider it a "Normalized Number", to compare a stock that (for Instance) gains 5% in 28 days, to one that gains 6% in 32 days. As questions arose around this concept, I came to the conclusion that, instead of buying only one or two good looking stocks, the best way to "Play the Odds" was to buy a basket of smaller positions in the most attractive stocks, and look upon it as your own "ETF". One then looks at the entire portfolio as a whole. Is my total NAV going up or down? With the odds that Peter gives us in these tools, there should be enough gain in the winners to far offset the stocks not meeting their PT before the expiration of the Time Limit, though these stocks sold at a Time Limit may well still be profitable after 63 trading days. This is reflected in the Cred(ability) ratio.

Here is where the power of time is realized. A stock that reaches it's PT in 30 days on average; is more desirable than a stock reaching the same % gained in perhaps 45 days.

The first thing I found out after beginning to learn from Peter Way was that I had to change my approach to investing completely. I had to "Unlearn" so much that I had held true, such as Diversity means owning different sectors. Diversity is, in reality buying differently managed companies, whether in the same or different sectors. The information he offers changed my entire way of looking at stocks. I have never been a "Buy and Hold" investor, but I looked at stocks individually, and set "Stop Loss" orders. I was never quite certain about my sell points, so I set my stop losses arbitrarily at what I considered my Risk Tolerance. While I was successful the majority of times, I was distressed at the number of times a stock would hit my stop loss, then after I had been pushed out, would climb back far into where I would have been profitable. In other words, I had no sense of the value of TIME in investing.
Then I read

Power of Time

It hit me then, that time is a cost of investing as much as Capital, Commissions and Fees. In fact, far more so as it is a "Power" rather than a linear cost. Think "Compound Interest". Instead of bragging about my "turning $50 into a fortune", I would just like to point you to Peter's articles on UPRO this last fall (2013) including:
UPRO was ~$66 on August 29. That position closed only 20 days later, having met it's Price Target . One needs to extract the profits in order to experience "Compound Interest". If you just reset the time, it then is buy and hold, and you do not compound your interest. I compare it to a decision similar to Dividend Reinvestment. Dips from volatility become buying opportunities. I have found that, despite a stock looking even better on subsequent occasions, it is critical to stick with the strict discipline of selling at the PT set on the BUY date. If the position still looks good for a buy, one still must compare it to other potential buys. While the original stock may show a 92% forecast of (for example) 8% in 45 Market Days, there may be many other stocks with equal or better odds that are forecasted to reach their target in perhaps 30 days.

While it is tempting to allow the Market Maker's DD suffice, one still has to do your own DD on any buy to make sure that it fits in with your diversity, philosophy, and any news that may have come out since the MMs set their PT. Even 1 day can alter expectations significantly. Further query's often indicate quite different prospects, and a stock may change very quickly. The information gathered is processed after Market Close, and news may change before the next day's open. Further investigations often indicate different prospects, and a stock may no longer be within the desired BR. Stocks do not always reach their PT, but the ones closed at TT are still often profitable. Here is where the Credibility Ratio helps. While "Past performance is no guarantee... Etc.", historical moves when a stock is in similar situations DO tend to repeat themselves, thus we are given "Odds" rather than the empirical "Buy, Hold or Sell" prognostications that Analysts so love.

Best Products: I have found that a valuation that is good one day, may move far from a buyable point the next. In order to get the best results, a stock should stay buyable for several days, either consecutive or over the course of a week. This in not 100%, as I have seen stocks be buyable for only one day, yet generate double digit returns if bought at open the next day. If you can track a stock on the Volatility Tool (See Below), and it stays steady, then it probably stays buyable.

PT=Price Target - The price at which Market Makers would close out a position, it having met it's predicted gain.
TT=Time Target - The length of time in which a stock is expected to reach it's predicted PT. For my purposes, I will be using ~3 months, or ~63 Trading Days. At this time a position is closed, regardless of gain or loss.
MM=Market Makers - The institutions that carry inventories of stocks in order to provide Market Liquidity. More can be read about Market Making at in the FAQ. and the article by Peter F. Way
BR=Buy Range: This is usually at or near the current price of the date that the Tool was created, as MMs (being people) can and do change their forecasts on a daily basis. I personally would like to be able to see a prospect stay within similar odds over a couple of days within a 3-4 day period; but that will have to await the site going "Live".

SP=Share Price

DD=Due Diligence: For these products, much DD has been done by the MMs; but each individual has their own preferences, from buying "Green Friendly" stocks to, in the case of ETFs, exactly what their holdings are in order to reach their goal. Included in this is assessing one's Risk Tolerance.

RI=Range Index: Quote from PFW "The Range Index is the simple calculation of the current market price minus the price at the bottom of the forecast range, divided by the price differences between the forecast top and its bottom. The RI value is the percentage of the price range that lies below the current market price."

BTF= Block Trader Forecasts: Herein is the meat of the product. I will go very deeply into these further below.

CAPM (Capital Asset Pricing Model)


While stocks may look good on a BTF chart for one day, my best results have come from a stock staying within the "Buy" range (in my case ~87% or 7/8) for at least several days, and even better for an entire week. This not only gives me confidence that the stock is looked upon optimistically, but allows me to confidently add to positions on dips. An example was JAZZ, where the BTFs stayed over 90% even as the stock dropped from ~$133 to $122 around it's reporting period. Acting upon the confidence of positive BTFs, I added to my position several times below $130 from 5/8/2014 to 5/15/2014. Within ~40 Market days, JAZZ had broken my sell target of $150. A stock remaining within the buy range for many days is almost always a very positive sign to add on dips IMO.

When doing DD on stocks I want to buy, I also do DD on the stocks I hold to see what, if anything, has changed. Some people may call this rebalancing, but that, to many people, infers selling losers. I now look at my total portfolio, and rather than paring off stocks that may be down but are still well within their estimated "lifespan"; I do not sell a stock that falls early in it's life, unless some serious event has occurred such as SEC issues, re-stating earnings, even the political climate or some other external force. That does NOT include the announcement of some Big Kid announcing they were shorting the stock. Early in a stock's ~63 Trading Day" span, such occurrences often create a "Short Squeeze" situation, which can propel a stock into closeout territory very quickly. If my DD reveals no other significant changes, these are often the best entry points. I point out the December 2013 such announcement on QCOR, driving the stock down 10+% to ~$50. As of Dec 27 2013, it had rebounded to >$54, at one point reaching $55. That was 10% in ~2 weeks. I'll let others annualize that, me, I'm laughing all the way to the bank.

Using the Tools

There is the temptation to call these charts; but they are better described as Tools, as Charts track historical fact, while these tools also contain forecasts. Some include historical points for reference; but they contain an element of forecasting as well.

The first tool that I want to discuss has just been developed, and is a true "Screener". It is called the Odds vs Payoff Tool.

As you can see, the estimated Odds% goes higher towards the right; and information calculated from column 9 below (% Payoff) decreases with height. In other words, the lower right quadrant is the target spot. I repeat, the % Payoff is not from "Sell Target Potential"; but from calculations made from historical data as it has been derived from results from similar Range Index and Odds, that have happened over the past 5 years. It is suggested that you do enough DD prior to buying this tool to have a promising list. has now released the number of stocks that one will be able to enter into this screener as 20. Of the stocks at the 100% level, many will be based upon small numbers of prior experiences; and therefore may not have enough prior data to be much more than a gamble. Stocks that plot from 85% to ~98% usually have more prior experiences. In the case of seeing a Tool like the above, I personally would be spending my money on BTF Tools for perhaps #'s 2, 3, 5, 6, 9, and maybe 11.

Volatility Tool

This is another tool for tracking volatility and Risk of stocks. It needs no numerical labels as it is a way of tracking similar positions on the tool as days go by. First, the theory of the table.

The main point here is that the Nobel Prize-winning model CAPM (Capital Asset Pricing Model) mistakenly suggests that volatility is a reasonable proxy for risk. That is completely incorrect. If there were no volatility, there would be neither gain nor loss. Volatility is a necessary component of the market to present opportunity. It's better tracked by this, less cluttered tool. One can track movements around this tool with overlays, but volatility does not equal risk. This may be the hardest thing for investors to unlearn.

This Tool is from the kind people at It plots the volatility towards the upper right; but the movement towards the upper left reveals only a stock's Range Index compared to previous plots. Your best way of establishing risk is from within the BTF Tools such as below. Once established, this Tool is extremely useful in tracking risk without having to buy extra BTFs as they should be used sparingly. There is where the combined wisdom of performance is applied; both from historical data, and the forecasts of the Block Traders. There is no shortcut to assessing risk. You must combine your DD, along with the BTFs
Here is the resulting "Intelligence List" from one of Peter's Articles. Each row is derived from the BTF Tool for that stock.
BTF Tool

In reference to this tool, stock 12 (NYSEARCA:IYW) has by far the lowest RI at -2, but has a lower volatility than Stock 1. (NYSEARCA:XME). (XME) has a quite high RI, putting it higher on the Tool, but it's volatility (+10.4% vs -13.3%) is rather higher, putting it more to the right on the Volatility Tool. If one were to build Volatility tools over several days, one could well track the RI and Volatility of each of these stocks. I recommend using a graphic program that allows you to create overlaying layers of less opacity to track movements. My personal favorite is Arcsoft's Photostudio, but there are many out there. There is important data here; but I personally will use it to track movements of a small "Basket" of stocks. Once the website is open, I will use it to track movements of RI and daily volatility. RIs and Volatility predictions can change quickly following the ever-changing opinions of the MMs. They are human also, and as such often change their minds very quickly about a stock's prospects. External forces (think Tsunami), company announcements, credit rating changes, and much information not quickly available to the Retail Investor all change daily, and sometimes even hourly. Example is

There is no "Cutoff Point" for RIs. They must be used in context with movements around historical RIs of a stock (see the Thumbnail images below).

R-R Tool

Used with permission

I have had to re-learn the uses of the R-R Tool several times. At first I thought that it was only for tracking stocks Day-to-Day (which it does very well; but there are indeed other uses. This is quoted from


Information Displayed

Quote from that Article.

"These maps plot on their horizontal (Reward) scale the percentage difference in price between the subject's market quote at the time of its near-future forecast and the top of that forecasts price range. Near-future means less than 6 months, typically 2-4 months."

( In My Words- The Horizontal scale is a forecast of Potential Upside from the Day of the Quote used, commonly 63 Market days for my purposes)

"The vertical (Risk) scale, instead of being a forecast, draws from actual experiences from prior forecasts for the subject, where the balance between proportions of upside vs. downside had been similar to what is being seen at present. The risk measure extracted from those prior experiences is the average of each forecasts worst-case price drawdown during the 3 months following the forecast date."

(In My Words-The Vertical Scale amounts to the average of historical maximum risks previously experienced on the way up to the forecasted Upside or over 63 Market Days, whichever comes first.)

What could be unfortunate comparisons in these pictures?

One unequal dimension in the above tradeoffs has to do with the number of risk experiences seen previously that were similar to the present-day forecast of upside-to-downside proportions. A single observation may show up for one subject's history, where dozens or even hundreds of priors were involved in measuring the average price drawdown of another."

(In My Words-This means that a stock may display well, but in the BTF generated, there are not enough prior experiences to determine if a stock is buyable, no matter where it plots in the R-R Tool.) That is why I recommend the Odds vs Payoff Tool for Screening, then plotting in the R-R as a tracking tool.

RI Tools was kind enough to send me a variety of Tool Views seen elsewhere when I inquired about them in order to help us understand more about the relativistic nature of RIs. Along with the RI information is a thumbnail Tool. You will see a range of Range Indexes along the bottom. Left to right are the plots of previous RIs. The height of the plot is the number of samples at similar recorded RIs up to 1261 (5 years of Trading Days). The further to the right the current RI is, the higher the RI. Once a plot has moved to the right of the peak; the less likely a stock with fewer previous experiences is likely to be buyable. Beware stocks with a fewer than 25 RI experiences and to the right of the peak. On the left side of the peak, low RIs in this area are very risky; but for the gambler, far more likely to succeed than the rightmost "Low Sample" RIs are.

Here is what we are looking for:

The combination of a fairly low RI, and quite a few similar experiences make this a less risky trade, and when DD is good, and if the stock has high odds (> 7/8), it is in a likely buyable range. Notice that the RI is to the left of the peak number of experiences. We look for a large number of good experiences similar to a present positive situation.

High RI Few Samples
Here is an example of few samples, and a high RI. This would be a high risk trade, and unlikely to even generate a "Probability" score. It might show up against the "100%" line in the 'Odds vs Payoff" Tool, if at all, often a stock entered into the list to be analyzed will be excluded from being plotted in the Tool due to lack of data or expectations by the MMs. Notice along the bottom they list the total number of RIs that they have recorded. Newer Issues will naturally have less experiences, and several articles has stated that less than 3 years of experiences is suboptimal for the real "magic" to occur.

Even fewer previous experiences make this also very risky trade, but the lower RI may make this a target for a true "Gamble" trade. Again, there are just too few prior experiences to generate any further reliable data. You must rely entirely on DD before gambling here.

Here is a situation with a large number of total experiences, but still few experiences of similar RIs. Another high risk trade, but because of the low RI, probably a better gamble than stocks with less experiences.

RI Thumbnail
Here is an unusual situation. Spikes in the RI Tool indicate periods of time when the MMs have non-current expectations, probably repeating for days on end within the 5 year history. DD MUST find an explanation for these episodes; or you could find yourself with a stock "edited out" of the R-R Tool for lack of MM expectations. Sometimes these are caused by stock splits or M&A events, in which case one has to decide if the risk is worthwhile. Here I refer to the "Editing Out" which Peter had to do in a recent article on ETFs. I lost the bookmark to this, but maybe others recall that one of the first commenters asked where certain stocks had disappeared to. The answer, as I recall, was that those stocks had been edited out and replaced with others due to lack of data. I regret my inability to link this article.
There is much more to write, especially about the BTF Tools, as well as using this information in a "Bear Market". So far within the last 5 years we have had some corrections, but no true Bear Market such as 2008-09 to draw data from. That said, Stocks with above average RIs, and low probability scores most often do not do well subsequently; and may be Short candidates. Not participating in Options atm, I will let others speak to such strategies.


Here we get into the real meat of the value of Peter's work.

This is an example of a BTF Tool

BTF Tool

This consists of 3 parts, the top tool includes a chart of prices over either 6 months or 2 years, depending upon buyer's choice. With each price point is the forecast High/Low price range. Two things of note here, one is how quickly the MMs can change forecasts. The other is in the second and 3rd tool parts. The red box indicates that the number of prior experiences is low. The RI Tool shows that the RI is far to the left, which makes gain more likely than if it was to the far right.

The middle tool

Range Forecast High and Low=The actual predicted price range forecast.

Current Price and Sell Target Potential - self explanatory.

Drawdown Exposure - Different from Low Price potential. I Quote Peter here: The drawdowns are not part of the implied forecast ranges. They come from the test of prior RIs like the present RI.
When we applied our standard test of how instances worked out in the next 3 months, or until they reached their sell targets, each one of them had some worst-case price drawdown. In an ideal situation, when the forecast was at the bottom of subsequent price progress, that worst-case would have been 0%. In all others, the actual price experience would be below the cost price of the equity following the forecast, some negative percentage change." Now in this particular graphic, there was only 1 prior, but the definition applies to all BTF Tools. it is NOT the Low forecast as a %, but is derived from an average of all past "Bad Experiences.

A similar but Opposite description applies to the "%Payoff" block, but is derived from an average of all past "Good Experiences".

The rest of the information is also rather self explanatory except the "Annualized" column, which is described in Peters Article;

" In each case, divide the closeout price [cp] by the end of day price the day after the forecast (it being the assumed cost of investment) [ic]. Set the result [r] aside.

When all instances of interest have been measured, add up all of the calendar days [d] it took to reach all of the closeouts. Count the number of instances that have been measured [n]. Multiply any one result by all of the others, one at a time, and take the [n]th root of the product to get what is known as their geometric mean [gm]. Then divide the total number of days [d] by the number of instances to get an average holding period [hp] for each instance.

Now take the [gm] and raise it to a power of (1 divided by the [hp]) to get an average rate of change per day [dc]. Then raise the [dc] to the power of the number of calendar days in a year to get the annual rate of change [ar], which is what is wanted when comparing things with different natures over different periods of time.

For those with an algebra fetish, here is that process in letters rather than numbers:

[r] = [cp] / [ic]

[gm] = (r*r*r*r…)^ (1/[n])

[hp] = [d]/[n]

[ar] = ( ( [gm]^ (1/[hp]) ) )^365)-1"

Detailing the Intelligence List;

In an attempt to avoid "Information Overload", The people at sent me this colorized "Intelligence List".


Yellow is quote data, gold is their proprietary analysis or derived directly from it. Blue is historical performance of the issue when the MMs valued its RI similarly in the past.

This is an example of a more attractive looking Intelligence List of Long Levered ETFs from

Dec 30 Long Levered ETFs

Remember that these Tools are not current, and are only for demonstration purposes. I call your attention to the 2 rightmost columns. The "R ~ R ratio is a simple math ratio of Upside Sell Target Potential/Drawdown Risk. We saw a very important column in the "next-to-last" column above labeled "Cred-Ratio".

Concerning the "Cred Ratio", I am going to quote Peter's explanation from the referenced article.

"The Cred.(ibility) Ratio is a simple measure of how the current sell target upside prospect is supported by the previously achieved % payoffs from similar Range Index events in the sample from history. That test is, when subjected to our standard test of 'was the sell target reached in 3 months, and if not, when closed out, what was the average simple % gain on all of the experiences?' "

Since this was published, Peter has changed the Cred Ratio expression to a different display, where what was 100% is now 1, 150% - 1.5 etc. Aditionaly, Peter has added a new column, the "Weighted R-R", which is not a measurement in that it has no "value" attached; but adds extra weight to those stocks with more samples experienced, and less weight to stocks with few samples.

**The Cred Ratio is especially important when a Graphic Display is confusing with many spikes or "Flat-Line" areas when there were no daily expectations. Any confusing graphic display should lead you to look at the Cred Ratio, and in my experience, any Cred Ratio below .9 (90%) requires extra DD before a purchase.

Something I should discuss on the BTF Tool is that you can look at historical data and often see where there were "Buy Ranges" and "Sell Ranges". The placement of the price on the vertical bar is simply the graphic display of the Range Index. What you can spot is where the price block climbs above the top of a previous Range. That is the Price Target established on a prior day. Below is a Tool of Amazon that points out several probable BR days, (Green Lines) and when the price broke the top of that day's Price Target. This may be confusing a bit, but not having the daily Odds available on these previous days, I can only say that if purchased on the Green line day, and selling on the corresponding Black line day, the PT was hit prior to the 63 day Time Target.

The first image is not annotated so you can better see the "Buy" price positions. My Annotations are a bit clumsy

These Tools do not IMO represent DD; but present a valuable tool from which I would select favorable looking stocks upon which to do fundamental DD. I am not a "Technician" who relies upon technical data only.

This is the updated Risk/Reward Tool of th 35 lesser known stocks in the article

Using Intelligence Lists

Assuming a purchased Intelligence list contains 20 stocks or more;

I take the top 10 from the R-R, Volatility and Win Odds Tools after the next day is finished. I want to make sure a stock stays favored for 2-4 Market Days. I then look at the SP history charts from elsewhere. Taking from that, the best 6, then do DD at brokerages sites as well as other sources such as recent SEC filings. While no one factor is a definite BUY, I can often find preponderences pointing either way. That said, I sometimes find a single "Don't Buy" signal such as SEC problems that are decided against a company, or things in their SEC filings that are hidden at the bottom. (I once found a fair looking stock; but in a disclaimer, they stated that they did not have the assets to meet their Notes Due in the next 30 days.)
I settle on 4 after 2 Market Days, and will add 4 more after 3-5 Market Days. The entire list will be treated as 1 "ETF" with a Purchase Date as rated at the date of the Intelligence List Data and Target Prices established and Sell Target Date established from the date of the original list.


IMPORTANT ANNOUNCEMENT is now open to the Retail Investor for the purchase of Intelligence Lists, and may offer other products at any time.



September 14 Update:

(1)Date(NYSE:A) (2)Tkr(NYSE:B) (3)Rng High(NYSE:C) (4) Rng Low(NYSE:D) (5)Current Price(NYSE:E) (6)Sell Tgt%(NYSE:F) (7)WCD(NYSE:G) (8)RI(NYSE:H) (9)ODDS(NYSE:I) (10)%Payoff(J) (11)DH (12)AROR(NYSE:L) (13)Sample Size(NYSE:M)
6/27/2014 XRT $90.77 $84.10 $86.55 4.90% -3.10% 36 87/100 4.70% 34 40% 238/1261
6/30/2014 XRT $90.89 $84.19 $86.80 4.70% -3.40% 38 86/100 4.50% 35 37% 253/1261

This is an example of many reasons not to buy. #1 Column (I) fell below 87% on the next Market day. #2 Annualized or AROR starts at 40% and drops. #3 It does meet my Sample criteria. #4 The Credibility Ratio (not shown) was good at 1.0 #5 The Risk/Reward (=J/-F) or %Payoff / WCD (Worst Case Drawdown) = 1.516 on the 27th, and 1.324 on the 30th.

As of Sept 12, the price was at 89.12. a gain, but not to the 4/9% predicted gain yet. This is a case where even though multiple parameters were not met, the stock still will probably be profitable when sold at Time Target of 9/28. It may even still hit it's Price Target. It had a few rough spots, dipping to as low as $83.61 on 8/1 Close (perhaps lower mid days some days) but still rebounded. This is why you do not sell at Range Low, or even WCD.

Disciplined Timed Investment means just that. No investment is held >63 Market days, nor sold before then unless it hits it's Range High Forecast