Speculator VS Commercial/Hedger driven markets

like stock Index futures VS physical commodity futures.

I'm really looking for a comparison of the two with regard to interpreting volume by the various market participants, CT1-4 as per the cbot liquidity databank format / COT report.

How does one know when the big commercials are entering the market? What effect do they have on price? Who's following who? Who actually are these big commercials? Do they employ techniques like "In order to buy 5000 contracts, you must first sell 500"? etc etc; and what other crafty tricks have they up their sleeves...?

If anyone could provide a comparison of the two or outline the nuances of the physical markets price action, or generally tell me how wrong I've got it all, I'd be much obliged. I've never traded with exchange volume before, nor ever even with an order book.. just been humping away on cable all this time with simple charts...

thanks

I presume you're also monitoring options associated with those underlying instruments? If you're not, these will provide significant additional indication of potential utilisation for what purpose by which sector of the trading fraternity.

But can I ask why you want to differentiate the two rather than treat them as an amalgamated whole in terms of action within their markets? The old 'divisions' and 'behaviours' of these two stables no longer hold to any degree that will provide you a consistent competitive edge. The rationales and operations have blurred to a large extent. Plus a great deal of the action has ‘gone underground’.

Maybe you know something we need to know? LOL.

TheBramble said:

Maybe you know something we need to know? LOL.

Click to expand...

very very unlikely!

I'd look to monitor and interpret the implied skew and p/c ratios certainly, with a market profile set up going on as well (I should probably note that I'm a recent Auction Market Value pupil, and am relearning so much I feel I'm starting again.)

You would confirming my suspicions that it doesn't really matter anymore what the different groups are doing, and just look at the volume as a whole, I just get a niggling feeling that I'm missing something by doing so...

What do you mean by "gone underground"?

cheers!

I don't say it doesn't matter rather that the net result on market price matters more. And the effort in splitting out the 'who's doing what with what' doesn't, in my current view, justify the effort involved, especially when the available data is less than pristine in the first place.

There are a number of channels for trading these instruments and not all of them are reported in the same way, with the same time or volume compnoent or even, in specific cases, reported at all (effectively).

Taking trade size off screen is big business. (DLP).

TheBramble said:

There are a number of channels for trading these instruments and not all of them are reported in the same way, with the same time or volume compnoent or even, in specific cases, reported at all (effectively).

Taking trade size off screen is big business. (DLP).

Click to expand...

thanks for elaborating...

Are you referring to otc structured products? I forgot all about them... Balls, another can of worms has just opened... What effect do these fellas have when they start expiring? I guess they just translate into more volume ultimatley? so no need to worry about them..
Please understand I'm learning a lot of stuff backwards here

Not exactly a can of worms, just a little extra fuzz. More volume - yes, but given what's considered vanilla today was exotic when I started out, it's increasingly tough to assign specific intelligence to volumes on any given instrument or class of instruments. They do tend to add a complex mix to the analyses so I'm always looking for an aggregate or synthetic that will have already done the hard yards for me.

I wouldn't say there's no need to worry about them. More a case of monitoring what's being rolled over - and what isn't and the prices versus value against those that are - and aren't. I tend to look toward the volatility angle more keenly than any other so you need to factor my bias in these responses to you and take them for they are worth to you in your endeavours.

My reason for mentioning options in my opening response to your post was that I find the mis-pricing (where such exists) on theoretical premium gives me a consistent and useful handle on which way the pros are biasing their trades. To imagine mis-pricing can exist in these markets for more than a split-second other than to convey a message or to hook the unwary is naivety I fully exploit.

Doesn’t answer your initial question regarding differentiating between the Commercials/Speculators, but I’m not sure that’s still the question.

hth

Sage advice, thanks TB... My gut instinct in looking for bias one way or other would be looking at skew and p/c ratios as well... I think I may have gotten carried away When I recently saw how detailed the cbot liquidity reports can be, thinking there might be an edge in the there if I can work out the dynamics of each participant alone and grouped together... But I'm over that now

I don't fully understand your point about mispricing of theoretical premium providing clues to market bias? Are you referring to, how I should I put this, temporary bumps in the smile? unusual volume and or IV at particular strike?

Having never used volume before, I'm now convinced I'm blind without it...
My next port of call is understanding the order book, but I'll fire that up on another thread...

thanks again...

MrMiyagi said:

I don't fully understand your point about mispricing of theoretical premium providing clues to market bias? Are you referring to, how I should I put this, temporary bumps in the smile? unusual volume and or IV at particular strike?

Click to expand...

My view is that ALL prices are theoretically mispriced, especially the further you get from ATM, and this is a function of the flaws in ALL of the theoretical pricing models. But we all seem to get along nicely pretending they, sort of, work. Except they rarely match the reality of the prices available.

What I am referring to is where premium is generously out-of-whack in one direction or the other, not just in and of itself based on the underlying and other inputs to the models, but considered as part of a group of correlated instruments or sectors, there are sometimes possibilities to discover pro bias. FWTW.

When you say you’re looking for the skew and P/C ratios to give you a clue as to potential bias, on what class of instruments are you assessing? I mean, do you have a target in mind and use ancillary correlated or even directly related instruments to assess for skew or do you look for any targets across any market? Keen to understand that as it makes a bit of a difference.

I have an arrangement of ordered (by premium delta) instruments and look for commonalities on type or sector. If I’m getting generous premium (expensive) across a number of strikes and months across related underlying, I have a number of options (no pun). I can either trade the premium directly by selling it (in the over-priced example) with or without, though typically with, a hedge. (I’m really low risk).

Or I can take a view that there’s a ‘deep’ reason why the offerings are being so attractively priced. If it occurred in just one isolated series or month, I’d probably trade as above and take the risk on it not being a pure misprice and reverting to mean. But when there is supporting behaviour from affiliated strikes, months and correlated instruments, and the volume does not support any professional interest, I tend toward an expectation of a further increase rather than the more traditional textbook expectation of a decrease (to the mean).

Of course, the interpretation of this in relation to the underlying (which is usually only of academic interest unless your position included physical underlying) is dependent upon the degree of the skew and the type (C/P) as to what I believe the pros believe will be developing.

You are then in the position of deciding which (from the ordered list) within the target area will potentially increase in value fastest and hardest. Providing the overall analysis has been correct, whichever one you choose is going to provide a profit, but there’s nothing wrong with cherry-picking.

Cheers TB, I'm getting your drift... look forward to hearing you expand on it later