Order Flow Analysis

Indicators or Order Flow?

Perhaps the best answer to this question is the Upstairs V. Downstairs Debate between Tom Baldwin (CBOT T-bond floor trader) and Peter Borish (#2 man for Paul Tudor Jones).

In short, trading systems tend to be longer term with larger draw-downs/risk/stops while trading Order Flow is reacting to what is moving the market now.

"... if I’m going to buy 900, I might as well buy all I can, it’s only going to be probably 1500 and in the process its going to move the market ..." "... the goal is to move the market as far as you can to a point where there can be a two-way trade [size] ..."

Order Flow Misdirection #1

Iceberg Orders

Exchanges such as the CME enable traders that choose to trade very large size to place their orders as Hidden Quantity Orders, also known as Iceberg Orders – Tag 1138.

“DisplayQty – The initial display amount for iceberg orders.

For Iceberg orders, the Order Quantity is a total of the Display Quantity plus the implicit hidden amount.”

For example a large player may place an order to sell 5,000 future contracts and need only display 300 at a time in the Order Book. When the first 300 fills the Display Quantity continually refreshes until the 5,000 Order Quantity is filled or the order is pulled.

Note in the image all the ES block trades > 50 are trading at the same price in the same second. Humans trading with humans or high frequency algorithms hitting an Iceberg?

Order Flow Misdirection #2

Spoofing Orders

Large players have sufficient margin to place very large orders. These limit orders are placed a few ticks above/below the Inside Market with no intention of remaining at that price long enough to be filled. The intention rather is to influence the market towards their real orders. For example, placing a large Sell order 3 ticks above the Inside Ask to ‘spoof’ the market lower into their Buy orders.

For example JP Morgan $920 million spoofing fine.

Order Flow Misdirection #3


Large players with positions in related markets regularly execute large orders to offset their risk in those positions.

"But remember, the real basic reason for the [futures] business is hedging. That applies to people who don’t really care where price goes, they are just interested in transferring their risk."

What moves the market?


Other than by Exchange Rules, Spoofing and Hedging, markets may be influenced by any relatively large size.

Reading Order Flow includes monitoring Block Trades and Market Pace/Context.

Exchange Data

Exchanges transmit basic data on a millisecond basis including the size of orders resting at Bid and Ask price levels (Limit Orders) and the size and time of Market Orders filled at the Inside Bid or Ask price (Order Flow).

Monitoring Order Flow Data