Is Volume an Indicator?

Discussion in 'Trading' started by christianhgross, Apr 8, 2009.

  1. For the past little while I have been arguing that volume is not an accurate indicator, due to OTC, and dark pools.

    There are two reasons why I came to this conclusion:

    1) I wrote for an investment bank their reconciliation program for OTC products. And I got to see what trades crossed the desks of the traders. It was then I asked, ok so what is the difference between the price of the OTC and the market? The trader answered, not much since then they could go to the market.

    These trades are huge, and they are not tracked since they are OTC.

    2) Dark Pools:

    http://en.wikipedia.org/wiki/Dark_liquidity

    Truly dark liquidity can be collected off-market in dark pools. .... In addition they prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible - all to reduce the market impact of any trade.
    .... When comparing pools careful checks should be made as to how liquidity numbers were calculated - some venues count both sides of the trade, or even count liquidity that was posted but not filled.

    Dark pools are intended for large trades. Thus either the trades are not on the books, and if they are on the books you find out much much later and hence your graphs are useless.

    In both of these cases we are dealing with huge trades. Thus if the market says there is a huge buy, who is to say that the other side is not even bigger and you will not know about it.

    In the case of OTC, dark pool, and market the only common piece of information is price. Because if price were not the same we would have an arbitrage scenario and that would be instantly removed.

    Therefore I think volume is not a usable indicator since you don't know what else is out there.
    Thoughts?