I fully agree with you on this one, however, I would expand this to the factors that influence the markets as well. Statistics that cover just the ES would be to one dimensional for me.
Sure. As you might know, the market can be devided into three subcategories:
1. Liquidity Provider/Market Maker: The guy that always offers two way markets at disadvantageous (for the taker) prices.
2. Toxic/Smart Flow aka. entities that sit on the sidelines until they see 1. making a mistake:
- Predatory algorithms that snipe stale quotes
- these guys:
3. High alpha flow: Retail, basically ET
Guys that just hammer away based on some system without edge. These people are the reason why payment for orderflow and commission free trading exists because it's worth more to trade against them than to take a commission.The main difference between 1., 2. and 3. is that 1 and 2 trade based on some evaluation model, meaning they know the correct price of the asset. Some compare the current price to fundamental valuations, others compare it to another asset, a portfolio or to a statistic.
So when you think that $GME is worth 50$ and it trades at 450$ you have 400$ worth of edge and the only thing you gotta do is not blow up in the process of capturing it.
In other words: 1 and 2 trades the assets current price against the current value of something else.
Trades of group 3 are completly random. They have no idea of how a market works and think they can bamboozle highly sophisticated players with a couple of trendlines, a client based frontend and 4$ round turns.
For my own trading, I'm mixing 1&2. I quote highly illiquid niche markes against a portfolio of liquid assets and I trade liquid assets based on my own valuation models. Everything is relative value, never outright, never momentum. When I get a fill, I know I have edge.
I don't trade the ES but I give you a practical example just for the sake of it.
A futures contract is not a delta1 product. Due to it's forward looking feature there is a difference between futures and spot called basis.
Different to commodity futures it's pretty easy to actually calculate basis for cash settled financial futures because all you need is interest rates and - depending on the product - dividends.
So it is pretty easy to figure out the price of the JUN ES by looking at MAR ES, which trades 10 points higher as we speak.
A market maker simply punches in the basis figure based on his borrowing rates and can quote the JUN off of the MAR. Because it's so easy, everyone does it so competition is very fierce.
Situation is different during expiration week when big players need to roll their position. Tickets are so big that you can sometimes catch mispricings as retail (with an autospreader and a good server location).
So the market maker knows the correct price of JUN by looking at MAR. However, there might be some guy who gets a special borrowing deal aka. a more favourable interest rate. He can quote a different basis and be better on the bid side. And that's the competition.
Can you do it as retail? Definitely no. Can you use that knowledge to your advantage. No, but for the love of god look at both contracts during expiration week, perhaps you snipe a good fill and lose a tick less.
As retail you can, however, look at markets that are too small for the big boys, quote them and siphon liquidity from the big markets. And that's where I am your competition
