Market Depth Velocity of SPY 2011 June 15 until 12:22 PM ET
Market Depth Velocity of SPY 2011 June 15, 12:29 PM ET
It has been said… With the past, I have nothing to do; nor with the future. I live now. ~Ralph Waldo Emerson Skate where the puck's going, not where it's been. ~Wayne Gretzkys father
Presenters background Graduate of Georgia Tech Professional Engineer System trader since 1996 Fund Manager EasyLanguage Engineer TradeStation Product Manager And now Institutional Trading Consultant
A problem trading Now Smart trading is based on projections of reward relative to risk, over time. Price = Established Value + Effects from Old & New Information Old info can impact price cyclically with diminishing magnitude over time. New info is key, especially as market efficiencies continue to improve. But new information is largely ignored.
A Solution for Now Market Depth is your best view of where an electronic market is Now. Market Depth is both old and new. Incoming quotes factor new information and can best forecast change. (Caveat: Market Depth is only a portion of a market. Much can be unseen.)
Improve trading Now …where the transactions take place, with new information to know good deals Improve entry & exit efficiency And reduce slippage (knowing bad deals)
Now, our trading experiences How often have you bought before a quick drop or sold before a spike? What percent of your average trade is lost to slippage? Market orders: Part of Spread + Impact Strategies: Paying beyond estimated fills Strategies: Missing estimated fills How much could your trading improve?
Improve by knowing good deals … when price nears newest quotes Or newest quotes approach price Watch the VWAP of incoming quotes And reduce slippage knowing bad deals Test: Is the incoming quote spread fair? Can it help distinguish good and bad deals? Is there central tendency? Are trades, relative to incoming quotes, symmetrically distributed? (normally?) Examples from Monday, 2011 May 13th
Distribution of trades w.r.t. 1-min VWAP incoming quotes for SPY
Distribution of trades w.r.t. Bollinger bands (20 bar, 1 sd)
Distribution w.r.t. incoming quotes & Bollinger bands
Distribution of trades w.r.t. 1-min VWAP incoming quotes for IWM
Distribution of trades w.r.t. 1-min VWAP incoming quotes for QQQ
Distribution of trades w.r.t. 1-min VWAP incoming quotes for DIA
Distribution of trades w.r.t. 1-min VWAP incoming quotes for BAC
Distribution of trades w.r.t. 1-min VWAP incoming quotes for C
Apply to trading ranges … when you feel a market is range bound Buy relative to VWAP of incoming bids and Sell relative to VWAP of incoming asks. Test: Do forward prices correlate with current prices relative to incoming quotes? Graph y-axis forward prices versus x-axis current prices, relative to incoming quotes. R-Squared for SPY 2011/06/13, 1-min bars: 1 min forward = 0.000409 (i.e. uncorrelated) 2 min forward = 0.004293 3 min forward = 0.002067 However, relative to original incoming quotes, there is some correlation of forward prices to current prices. There is room for momentum trading too.
SPY trades v. trades relative to incoming quotes, 1-min forward
SPY trades v. trades w.r.t. original incoming quotes, 1-min forward
SPY trades v. trades relative to incoming quotes, 2-min forward
SPY trades v. trades w.r.t. original incoming quotes, 2-min forward
SPY trades v. trades relative to incoming quotes, 3-min forward
SPY trades v. trades w.r.t. original incoming quotes, 3-min forward
Other ways to Trade in the Now Deduce hidden market interests Monitor scheduled impactful events Measure propagation of impactful news Dig for information fundamental to asset pricing, that is not widely known Use weather projections for commodity markets and similarly affected markets Etc.
Summary Use market depth, esp. as incoming Know good prices for efficient trading Trade range bound markets, etc. In general with newest information Improve price, volatility and time projections And thus one can improve portfolio balance Get in early on sector rotations: before profit opportunities decrease and risks increase
What to do Now Use Market Depth in TradeStation 9.0 e.g. the Market Depth Velocity indicator Collaborate with other traders Find services on the Strategy Network Join us at www.QCLsolutions.comwww.QCLsolutions.com New products for Market Depth analysis New tools for key economic & market data New collaborations for institutional-level news sentiment analysis with TradeStation
Improve each trade … where the transactions take place