relative value & spreads vs. auction theory, market profile and all that

Discussion in 'Trading' started by Jonathan Weissberg, Sep 17, 2019.

  1. Hello Kind Sirs!

    How do all these concepts account for products that are heavily spread?

    Let me explain: I've been reading about 'auction theory,' which for those who don't know, is usually associated with using market profile & footprints to trade. There's a concept of 'fair value' which is determined by measuring 'volume at price' for any given product and states that the 'fair value' of a product where buyers and sellers are approximately equal is where the most volume has traded... there are also associated ideas like around this area is where price consolidates, there's less interest, OI doesn't really increase, and there's less participation from higher time frame participants.

    But all of this is about the product in USD terms. But that is only one way of measuring the value of a product. If a product is heavily spread, this whole idea seems useless. Like if I'm trading the 2 year note and the whole eurodollar curve is starting to move and it's not led by credit then the fact that the 2 year note is in the middle of its range where lots of volume was done doesn't mean shit...

    Just wondering if anyone has given this thought - would be really keen to bounce ideas of other friendly friends who like thinking about the market conceptually...

    thank you
    hello please
    come again
  2. Real Money

    Real Money

    Hi. I am focused almost completely on the instruments NQ, ES, YM, RTY. You mentioned spreads and the relevance of the spreads vs depth of market and market profile.

    This means that the following does not apply to treasury, eurodollar, or other commodity futures.

    The equity indexes are spread heavily. VWAP is important, but like you said, 'value' zones, 'levels' and 'volume at price' is only part of the picture. You are talking about predicting price action and buy/sell activity.

    This means that you have to consider the following

    large spec positioning
    spread positions
    macro and rates space

    I am watching the best and most effective of this stuff (you'll have to trust me on that)

    I can tell you this.

    This is all about opportunity. If the large spec needs to move volume and adjust positioning then they are going do so with respect to liquidity. The guys moving large size through these markets are operating under liquidity constraints.

    In other words they have be careful not to move the market and get other spec too involved. This is a game of hiding the adverse price movement.

    In other words, if they need to buy, then they will start buying but they will try to limit (as much as possible) the adverse price movement. This is why you see slow trends all the time.

    Trust me, they care about how thick the book is and how much the liquidity reacts to their interest in that liquidity. Everybody moving large size (institutions) is working under these constraints. There is no simple 'fair value' here. But that does not mean that the buyers/sellers don't have preferred prices or price targets!

    The concept of fair value and volume at price being predictive misses a lot of the nuance here.

    I have threads In the Index Futures section where I talk about the index spreads a little.

    Microstucture is what I watch the closest. Good luck.
    CharlesS likes this.
  3. qlai


    Isn't it same as observing orderflow (DOM+TnS)?
  4. Real Money

    Real Money

    In some ways yes, but there is information that is not really shown in DOM, footprint, TnS, and stuff.

    I mean the arbitrage activity. The interexchange cross product arbitrage is not really shown with those things.
  5. Thanks for replying...


    Spread to each other, and spread to cash... sort of like rates.

    Not even predicting price action or buy/sell activity, but just figuring out how spreading affects this 'market profile' & 'auction theory' type thinking.

    I guess it'll vary, market to market.

    But how does one watch 'large spec positioning'? the COT data is delayed.

    You say you're watching spreads (I assume that's what you mean by 'spread positions' since I don't think any data is published on spread positioning), and yes, if we say a product is priced relative to USD but also in relation to other products it makes sense to find a way to integrate this spread information BUT at least in bonds there are SO many possible spread combinations it would be impossible to keep everything in mind - not only in the US eurodollars trade far out in the curve but everyone uses different weights for different products so it doesn't seem information that you could easily integrate.

    Sure, I'd agree with this insight. It changes depending on how urgently they need to get an order done and so on. The less urgent the shittier and grindier it is.


    Awesome, look forward to reading through.
  6. I don't trade equity indices and don't even trade spreads just simple outright stuff in primitive products like small cap shares... but still curious. Can you go into what this is?

    What arbitrage activity are you talking about? to cash shares? how is that helpful?

    Interexchange cross arbitrage?
  7. Real Money

    Real Money

    Basically, I am still trying to master this but, you have to see how the index reacts to these.

    (1) Cash and Carry Arbitrage
    (2) Reverse Cash and Carry

    If the index is firm in the presence of C&C arb then there is plenty of supply on the sell side of the stock market.

    If the index is firm in the presence of Reverse C&C arb then there is strong demand in the stock market.

    The first one removes offers in stocks, so the index holding is very bearish.

    (institutions are trying to liquidate stock) <<<<<

    The second one removes bids on stocks, so the index holding is very bullish.

    (institutions are trying to acquire stock) <<<<<
    The inter exchange cross product arbitrage happens when the spread get wide enough. Large spec knows this and so they will try to prevent it so that the market doesn't go against them.

    Here is a chart of the spread. It's a war.

    ES PREM.png
  8. CharlesS


    What I sense more and more is that what makes the market appear erratic and thus hard to trade from the pov of a small trader is in great part due to the inherent weakness, the vulnerability that is inescapable for large players, for whales. A whale must expend a huge amount of time and energy to dissemble its actual intent lest the market figure that out too soon, before the distribution/accumulation is complete. This is an extremely important weakness. The trick for a small trader is to detect the dubious waves produced by whales, and enter when they appear to be ending. There is huge opportunity when the small trader can do this.
    Last edited: Sep 22, 2019
    PromisingTrader and Real Money like this.
  9. CharlesS


    Does anyone have a view re:
    • Whales are what portion of mkt players & capital ?
    • Related, what portion of players have the money, skill and interest to actively change or maintain the current market direction, by forcing closes above/below important levels, or by achieving breaks of significant highs/lows ? ie what portion are making the market, as opposed to reacting to it ?
    A complexity here of course it that every time frame has its own schools of whales, and some/most whales swim in multiple time frames simultaneously, and have to.
  10. qlai


    Are you getting this from some book? What year was it written?
    #10     Sep 23, 2019