Any of you traders out there successful trading mostly on order flow? I always thought it would be less viable today because of the speed of the market and execution, but wondering from others experiences. Is it still viable even today, and if so what are you looking for in order flow to profit from? Is it the widening/narrowing of liquidity, increased trading activity from institutions, etc.?
A long time ago, I looked into it, but came to the conclusion that the order flow products offered today to retail won't do it. Here's where order flow gets messed up: I short 2 SPY ATM calls and go long 100 shares of SPY. That's a delta neutral trade, but someone looking only at the SPY underlying will consider that bullish. They don't see the full picture. Pair trading and other forms of arbitrage can complicate things further. Might work on futures commodities, but would need to at least consider changes in option open interest delta weighted by strike.
Yeah, spread trading adds to market noise making order flow harder. I wonder how it would work in commodity futures, the same noise can be added to these types of markets, but futures are different, don't have earnings and company fundamentals to worry about. And isn't order flow just harder to track, I mean those numbers are just flying by with speed, caffeine is a must hehe
Exactly. This is why volume or at least order flow on index futures never made any sense to me. Just by arbitrage a sell order on the ES futures might be offset by a buy order on SPY or a basket of S&P500 stocks. So, did that sell order/volume on ES mean anything? Likely not. Maybe it can make a difference if you're a very short term scalper.
Generally there’s no value in order flow, though positioning is very useful. If you know that a Blackrock growth fund opened a new position in a company and it recently reported earnings and raised guidance, you can infer subsequent flow into that stock.
Correct me if I’m wrong, but before such info goes public, it’s disseminated to their prime customers. So once it becomes public (after 45 days?), all the smart money is already in and possibly getting out?
While it is true order flow is a FORM of volume analysis, order flow involves looking at individual trade sizes and type of order used. Limit orders can be seen on a DOM, whereas market orders are seen only as actual and executed volume. Volume analysis and order flow analysis, in practice, are 2 different things.
Order flow by looking only at a single underlying might work if the product cannot be easily hedged and does not have options. Something like a biotech penny stock. If it doesn't work there, then I don't see how it can work on a product like spy which can be easily hedged. You might be able to find some edge by looking at option open interest close to expiration. If you think you're in a bear market rally and there's a lot of itm calls than itm puts that cannot be absorbed by shorts on the underlying, then maybe there's a good chance that a lot of people may want to reduce their long position before expiration. Another strategy that I have considered, but not tested is buying when price moves above areas of significant call open interest. These tend to correspond to areas of resistance on charts. It makes sense that if a lot of people are short calls and price moves above that area, they went to hedge their short calls which directly or indirectly results in buying the underlying. Although you never know if they might already be long the underlying or hedged in another way, on average, it might be the case that a move above significant open interest areas results in new buying. Ultimately the balance of buy and sell pressure shows up in price.
I'm finding tape reading much harder now. I think the L2 is lighter and more transactions are happening between the spread. Gone are the days where there's a big offer or big bid coming in and moving a stock until it gets taken out.