Tick by Tick Volume Analysis – Futures Redux

Yep, I am gently kicking the hornet’s nest once again. I’ve refreshed one of the most widely read and (some say) provocative market studies on RD.

Read the just-published results here.

Have a great weekend, everyone…

3 replies
  1. Derek
    Derek says:

    Hi Duque –

    First, I wanted to thank you for the time you put into both studies and for sharing them with the trading community. Excellent work, El Duque! 🙂

    I have a couple of questions, and I’m more interested in your thoughts on the topics than a final answer.

    1. As compelling as the data can appear, it seems that it discounts timing of the big orders. For example, there may be 5,000 1-lot trades going back and forth in an area, but there isn’t much directional conviction until a few 100-lot orders come through. This influx of big orders is then followed up by another 5-10 thousand 1- and 2-lot orders, fuelling what the big order started. As depleted as many pits are, we still see examples of this reaction on trading floors today. Does your study take into account timing of the orders or price activity before/after the orders?

    2. Regarding the “What if?” scenario you offered, if they know I’m looking for big trades, I should probably assume they know that I know. And I should then assume they know I know they know I know. It seems this is only useful for either of us if one has a better idea how many times to iterate the “I know they know” process. Or is it a diluted edge that turns into a coin-toss for both of us?

    Again, thank you for posting your research. I am sincerely interested in this topic and your thoughts on the possibilities.

    Take care –


    btw, sorry if you have addressed similar points in the first study; I haven’t had a chance to read it or the comments yet.

    • El Duque
      El Duque says:

      Good questions. Not answers, but some thoughts below.

      1) Where is your data to back this example up? Have you studied timings of orders at certain prices? Are you sure they have the effect you assume they do in your example? I’m only asking rhetorical questions, really. I’m not trying to hassle you. ;-} Big orders can be offensive, defensive or obfuscatory. Meaning we have no clue how long those fills are held. When big ticks come across, many tend to think it’s big money getting positioned in for the long haul. 1000 contracts bought in 100-200 lots in the ES at a price can easily be sold one/two at a time almost immediately. Even for a tick, in an arbitrage or spread trade. We don’t know. And that’s the point. There was a time when we might guess about what big lots mean (your floor traders). We can’t anymore IMO. And HFTs get paid (via rebates) for providing liquity. It’s in their interest to trade small and often. They are motivated, rewarded and have the technical capability to do things like I describe. So why would they not?

      2) Only a small fraction of people know they know you know that they know. Most traders, especially novices, think they know what something like a big trade means. But the reality is that there is a big information disadvantage for the average retail trader vs the average algo. I think the algo writers (as a major systems engineer myself, I know how the algo creators think) want to prey on those who are on the disadvantaged side of this info gap, and I think big lots are one way they sometimes do it. Especially in the ES. Tick sizes are large, and they know where small traders tend to place stops close to important prices. And they know what the average retail trader is looking for to get into the market.

      So… “what if” they sprayed a few large lots across the tape at an obvious S/R price with the intent of making the novice believe, as in your example above, that this was the start of a big up move and the price where the big lots traded will “hold.” Then they waited, and then dumped a couple points a few minutes later and stopped out those novices. Then resumed the up move. *You* might not be fooled, but many are. Do that a few thousand times a month and now you’re talking about interesting (and low risk) money. A big part of this is kind of strategy is not technical engineering, but social engineering. Yes, these dudes are quite clever.

      In fact, I have a setup I use often called the “Double Tap Sucker Punch” which is organized around this exact scenario. It’s on the blog if you want to see the details.

      Anyway, the whole point of the language of the study is to (hopefully) provoke you think exactly the thoughts you have and question the things you think you know. Maybe what you know is still sound, but maybe it’s time to revisit previous assumptions. I think we all have to do this from time to time in order to become and remain successful. That’s all.

      Personally I love the robots and how they behave in the markets. I know how the creators of these algos think, and the constraints they have to operate within to implement them, and the variables they have to play with. But most of all I love the algos because they do the same things over and over again – predictably. Because computers only do what they are told. Unlike humans, who are anything but predictable – at least in the short run. And it’s the rare trader who reacts exactly the same way twice to the same situation, unlike an algo. And the market is not made of rare traders, if you know what I am saying.

      Not sure this helps anyone, but it was a fun discussion.

      • Derek
        Derek says:

        Thanks for your reply. Excellent questions and points. I agree that big orders can have different objectives, including luring in weak hands. You also made an interesting point about algos vs. humans: algos may not win every hand they play, but they’ll play the hands the same. Most human traders, not so much 😀

        I’m glad I found your site, because you offer insight into systems trading. I’m not a systems trader, but certainly appreciate gaining an understanding of how they can operate.

        Blah, blah, blah, yes I love this game and never ever get tired of it 😀

        Looking forward to reading more of your work. Thanks again and take care –


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