Regarding the question I raised on cumulative delta, I shared some charts with Ernie demonstrating the issue and we exchanged a couple of emails.
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The following user says Thank You to Big Mike for this post:
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.
Last edited by RichardHK; June 23rd, 2013 at 03:00 AM.
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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