Often, I hear from professional traders that trading according to the order flow is critical to their edge. What exactly is order flow? Is it something that only institutional brokers who can see the client orders coming in can execute? Is order flow an impossible strategy to smaller retail investors of Interactive Brokers? Is order flow referring to the time-and-sales information which tape readers use?
Can the professionals here shed some light?
The price of a security is determined by demand and supply. Order flow is a way to quantify the direction and the magnitude of the changes in the demand and supply. Order flow can be determined from the exchange limit order book, to which you can have access with the so-called "market depth" data subscription, sometimes also referred to as the L2 (level 2) market data feed.
You don't have to be an institutional trader to have access to market depth. For example, with Interactive Brokers, you can have market depth for as little as $20 per month. However, a high quality, institution-oriented market depth feed would cost thousands of dollars per month.
Once you have the subscription, the challenge is to interpret the complex dynamics taking place in the order book. For some liquid instruments (such as the ES), the order book changes hundreds of times per second, so any kind of eye-balling the book is almost certainly a futile exercise. There are some tools (both open source and commercial) for analyzing the order book with the purpose of predicting the order flow. The most recognizable players in this field are probably Jigsaw and BookMap, so look them up and see what they do.
There is also a challenge of dealing with the historical order book data, if you want to backtest against it. The data sets are massive (think in terms of gigabytes per day, per symbol), and are very expensive to get.
There are people who will opine that the L2 data is useless, and there are people who will say that they make a living from trading the order flow. Just like with anything else, you would need to research, test, formulate your own ideas, and make your own conclusion about it. This would probably take you about 10,000 hours of dedicated work.