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Webinar: Ernest Chan on Leading Risk Indicators and Order Flow
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Webinar: Ernest Chan on Leading Risk Indicators and Order Flow

  #21 (permalink)
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Regarding the question I raised on cumulative delta, I shared some charts with Ernie demonstrating the issue and we exchanged a couple of emails.


Ernie Chan
Mike,
I would trust the number given by futures more than that given by SPY. SPY can be quoted and executed on more than 50 venues, some of which are dark, so the relationship between quotes and trade prices are more tenuous. The same consideration applies, of course, to any stock, which is why I have never attempted to apply order flow to stocks.

Best,
Ernie

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  #22 (permalink)
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Mike,

I am possibly (most likely!) wrong, but I do believe the orders traded on the SPY ETF does not relate directly to price as it does on the ES. Not the same auction market mechanism, so not correlated directly.

The SPY is derived from the ES, but gets adjusted for various reasons by the provider. So SPY orders are really independent of indicated SPY price. This would affect any ETFs derived from other markets which if so, would make order flow trading (and use of CD) on these markets useless.

Look forward to be corrected, but no data from Ninja download servers to check this now.

Richard
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Last edited by RichardHK; June 23rd, 2013 at 04:00 AM.
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  #23 (permalink)
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RichardHK View Post
Mike,

I am possibly (most likely!) wrong, but I do believe the orders traded on the SPY ETF does not relate directly to price as it does on the ES. Not the same auction market mechanism, so not correlated directly.

The SPY is derived from the ES, but gets adjusted for various reasons by the provider. So SPY orders are really independent of indicated SPY price. This would affect any ETFs derived from other markets which if so, would make order flow trading (and use of CD) on these markets useless.

Look forward to be corrected, but no data from Ninja download servers to check this now.

My understanding is that the VALUE of the SPY aka NET ASSET VALUE comes from the value of the holdings - which should be pretty much in line with the S&P500.

Still - it can deviate because it is an instrument in it's own right. So SPY can deviate from the index BUT stat arb programs will step in when that occurs... There's Ernies mean reversion.

In other words, SPY has a value but it also has a price. The underlying stocks define the value but the market action defines the price.

The thing about the SPY is that ARCA give pretty decent rebates to people that provide liquidity there. I think some other exchanges do to (PHLX). The SPY is also a bit more volatile moving approx 2.5 cents per tick on the ES.

With a lot of rebate trading, you will get a lot of people putting in limit orders just for the rebate or rebate + spread or rebate + day trade. It all mounts up in the end.

Anyway, the upshot is that SPY is priced like any market. Market orders consume liquidity and that enables price to move. That liquidity is heavily impacted by the rebates, so the cumulative delta will not work as well on that market.

Ernest also mentioned dark pools screwing with delta studies on stocks, although I'm not sure how well this applies to SPY. In my opinion dark pools are neutral in terms of order flow because they do not consume visible liquidity and therefore do not move price.

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  #24 (permalink)
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I come to this forum only because of Ernie!

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DionysusToast View Post
With a lot of rebate trading, you will get a lot of people putting in limit orders just for the rebate...

You can't do this on SPY.

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Big Mike View Post
Regarding the question I raised on cumulative delta, I shared some charts with Ernie demonstrating the issue and we exchanged a couple of emails.
Mike

Not surprised it doesn't work on equities (indicies) or gold.
I'm surprised anyone would use it one currency futures since the interbank trading would still be hidden.
I found it useful only on crude.

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  #27 (permalink)
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would love to hear what EPChan has to say now. Market have also evolved and since then he has also done additional work in this space. What kind of Risk models can the retail trader use.

Also replying to the thing on Cum Delta...useless on SPY which many may have already found out. Nope it is not. It just moves differently....SPY / ES Cum Delta will not have any commonalities.

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