Hi Martinghoul, I understand the point regarding the odds, and I agree with you in general. However, what drives me crazy is comparing for example 3 March with 29 March levels, where the odds were about the same. 3 March EurUsd was 1.0991, today it is 1.1340 The same goes for SP500 future, that was 1981, while today is 2060, and so on. Don't want to oversimplify, because I know there are many other factors in play, and I am not even a big fan of algo plots. My point is that events like yesterday speech look like more being a catalyst for something that the market has already decided to do, than a proper trigger. All the interpretations and explanations that we get after the move are only ex-post, but don't really make sense in themselves. Think for example to what happened after last ECB meeting. They threw any kind of instrument, and yet Euro gained against dollar. Afterwards the explanation was that there was no commitment to further easing... a joke if you think about it. Simply the market was already bearish on dollar and still is. Just wondering why some players need these catalysts to take a position in the market, while they could have taken it in advance at a better price.
Markets are driven by liquidity. Liquidity ALWAYS is provided at steep discounts and premiums to current prices. News events move markets instantaneously to these liquidity centers. That is why you see gaps or sharp moves up and down.
Liquidity has an opportunity cost for the provider. He/she has to be compensated for that and that cost gets passed to the buyer of that liquidity. You can think of it this way, in an uncertain world, how much liquidity would you provide at the current price? Now on a relative basis, how much would you provide say at 3% higher or lower? Is it more or less? MORE! So we can derive a relationship now between liquidity and price. And by liquidity provider it does not need to be a bank or market maker, but even an individual. To help you understand better. Say I showed up at your house today with check in hand to buy it. Say it was currently valued at 400k. Now you and your family have no interest in moving, it wasn't even for sale. Let me ask you now, if my check was for 800k is it for sale now? You betcha it is. At 400k there is no liquidity on your home. But at a steep "premium" it suddenly becomes available. And that is the theory of liquidity. At a large enough discount or premium, there is a market price where substantial liquidity can be found. Make sense?
Like you said yourself, there are many factors in play... If I am an algo guy armed with a powerful machine and a fast connection to the trading venue, I would argue that, for me, it's much higher Sharpe to not position for things in advance, even though my entry price might be better. If I, quite literally, get in and get out seconds before and after a particular event where my machine can be marginally faster than the mkt, that's a much better trade for me. That's how these higher frequency models operate, to the best of my knowledge. While I, like yourself, find their way of doing things bizarre, that's the world we live in nowadays.