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I know conventional wisdom is that Big Money is what moves the markets. I'm wondering if this is a bit outdated or not? While I can understand that being the case for thinly traded commodities, but is it true for ES? With the popularity having grown so much in the last decade, have we seen the aggregate small trader now being the ones who move the market? What indicators would one use to track this most effectively?
I wrote an indicator for NT that uses T&S to calculate the Cumulative Delta for a bar, divided into those block sizes of 3 or less and those of more than 3. Further, I can see if the CD is positive or negative for each group. There are WAY more 3 or less blocks being traded... on the magnitude of 4-10 and generally, the CD direction is lockstep with both groups.
While this is far from conclusive evidence that big money is NOT moving the market, I was wondering if anyone knows of an indicator, or a better method of illustrating the impact big money has on price. I considered using the order book, but since large orders can be placed and cancelled it seems that isn't a great indicator either. Plus, placing a limit order for a large block trade with the full intent of having it executed, is exactly the opposite thing to do if one is attempting to obfuscate their trade.
I made need to cross reference my indicator with the DOM filtered for large blocks to see if that reveals anything.
Any comments, criticisms, suggestions are all welcome!
Supply and demand move the market. Any market.
You can see hundreds, even thousands of ES contracts being traded with the market not even moving a tick and you can see the market jump erratically on very little volume. Such big markets cannot be moved by just one institution only. Only thin markets can be played by large volume players and so you don't want to be there.
I don't think big money equals big orders. If big money would place very big orders, they will get a lot of bad slippages which is what they want to avoid.
Instead, they probably place lots of small orders and let the market absorb them in those ranging market conditions, so their average price is much better with less slippage
Totally agree with Erwinbeckers post.
Of course there are moments when big and unexpected news hits the market and price moves to a new area with volume. But that doesn't happen every day. Or every other day for that matter.
Of course I agree that supply and demand is what moves the market.
"Big money" doesn't necessarily mean a single institution. I would think of "Big Money" as aggregate big institutions that collectively share a predominantly (not 100%) bull/bear bias on the instrument at some point in time. Together, they would move the market as their presence in the market increases either supply or demand. On the face of it that seems logical. I guess it comes down to quantity. Do they have more resources collectively than all the small investors? I'm just curious if anyone is aware of an stats on this.
40 years ago retail is about 1% of the market. Nowadays it's about 10%. And that's mainly stocks. In futures it's sub 1% but of course market makers are buying selling futures based on options that they sell and buy from retail.
I haven't looked lately, but I think that in the past (not real long ago, maybe a few years), the average trade on ES was about 3 contracts.
This could be checked by someone less lazy than I, to see if it's still true.
If so, I'm not sure what it does to the near-universal belief that the big money moves the market, and, of course, always gets its way.
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Thinking about this, I could divide this into two questions. One is about the size of the participants in the markets. The other would be the perhaps true, or perhaps semi-paranoid belief that the big guys are in charge and always move the market where they want.
I did say perhaps and semi paranoid, not because I'm attributing anything to present company, and not because I think "they" don't move the market. I just think there are probably a lot of things that go into particular decisions by institutions, many of which are probably more related to hedging against risks in other markets than manipulation.
I do think that it may not matter much, since we see the effect of what everyone does in the price and its movements, so the identity and the motives of the movers may not matter, or may not be decipherable.
But also, I don't know a thing about order flow, and so probably am a bit naïve in this discussion.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
3 contracts is consistent with what I found in T&S. Clearly one can't see big money there. I know there are people who have used T&S along with the order book to programmatically match transactions with orders. Doing it that way seems to be the only way to get a reasonably good idea who is currently in the market. Big limit orders are dispersed piecemeal by necessity as orders on the other side are matched up to it. While it is possible to have single size orders placed programmatically, I doubt the big institutions bother with that as they deal in such high volumes that fill efficiency would make it impractical. I find it all very interesting though
Large players split their orders. They may be buying tens of thousands of contracts that day, but they'll do it a few lots at a time. I worked for a large bank and a large part of our infrastructure was just about taking that large metaorder and splitting it up. So you aren't going to see what the largest players are doing by just looking for the largest market orders.
But orders do move markets. This is well proven empirically. The aggregate impact of such metaorders follows a square root law.
change in price = constant * volatility * sqrt ( size of metaorder / volume for period )
The constant is something that you calculate for each instrument, but is remarkably consistent over time. Firms will track this by executing a metaorder, and then doing the math to solve for the constant.
But where it gets complicated is that the large player will have impact when they try to exit their trade as well. What's more is that the impact of their trading tends to create a sort of liquidity wake behind them. So if they buy and then immediately turn around and sell they will on average lose money.
What's more is that we've found that all orders have an impact, and this is true regardless of whether or not there is any informational content behind them. So a large metaorder will move the market whether they're trading on insider information they have, or if it's just a fund rebalancing. They can move markets completely against the fundamentals, and they can move it against whatever technical setup you're seeing.
From this perspective the only way to make money is to correctly predict future orders. So in a way it's true. Big money does move the market. Unfortunately, it just makes the problem we're trying to solve more complicated really. Correctly predicting such orders on an intraday basis is incredibly difficult to do consistently with our resources.
