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measuring supply and demand

supply and demand in an electronic market

Quantity is the foundation of measuring supply and demand.
according to investopedia - futures volume
"There is little research into the volume of futures compared to stocks".

measuring supply and demand

a vertical market
Measuring supply and demand in a vertical market is straightforward. Manufacturers obtain raw materials from suppliers, manufacture product and distribute through retailers. Commonly known as the "supply chain". Supply of raw materials and product are controlled by demand at the end of the chain. In the long run, the supply chain is stable. Retailers, manufacturers and suppliers measure their requirements by the quantity of sales going out the door. Participants are known and co-operate with one another. A good example is "just-in-time" ordering systems. The components are identifiable. Orders, customers, deliveries, suppliers, time, seasonality, stock holdings etc. Price is usually set at the beginning of a contract period and doesn't fluctuate on a daily basis.

a horizontal market
In the short term, futures markets are horizontal or flat. The market structure, that is, not price. There is no "supply chain". Buyers (demand) and sellers (supply) do not know one-another. Participants can be buyers one minute, sellers the next. The identifiable components are price, time, and size. Suppliers and customers are anonymous. Each can participate, hit, sit, withhold, wait, suspend, exit, delay, cancel, place fictitious (dummy) orders at will.

a futures market
Measuring supply and demand in a futures market leads to identification of

• (a) short term intra-day trading, and
• (b) medium term arbitraging.

Appreciation of the following requires an understanding of arbitraging and the role of arbitragers. That's what its all about. Because the role of the future is to track the physical cash, then while cash is rising, the future is either,

• (a) being bought - no arbitraging, or
• (b) being sold, into a rising market - arbitraging.

what factual information can be established

The following example is based on a single trade of 1 lot where price has just risen 2 points.

Known facts are :-
There is one buyer and one seller
Price has risen 2 points.
Quantities are available on both the bid and the offer.
Buyers and sellers always have opposing views of the market. Which one is right.

scenario 1 - demand
If someone hits the raised offer, it can be stated :-
The buyer was more enthusiastic than the seller because the buyer met the sellers price.
The transaction was a buy. Whether it be opening long or covering short - doesnt matter.

Applying Mark Douglas's "Psychology of Price" :-
The buyer considers there is further capacity for price to rise.
The seller is relaxed, or indifferent, and considers there is limited capacity to rise.

scenario 2 - supply
If someone hits the raised bid, it can be stated :-
The seller was more enthusiastic than the bidder because the seller met the buyers price.
The transaction was a sell. Whether it be opening short or covering long - doesnt matter.

Applying Mark Douglas's "Psychology of Price" :-
The seller considers price has topped and cannot rise further.
The buyer is relaxed, but has the view there is further capacity for price to rise.
The seller is keen to lock in profits by covering long, or to open a short position.

Open Interest
Depending on whether the one transaction :- opens 2, or opens 1 closes 1, or closes 2 :-
Open interest will either, increase by 2, remain constant, or reduce by 2.
Because the conditions apply equally to both the above scenarios, open interest is meaningless.
It could rise by 2 in the supply scenario, and fall by 2 in the demand scenario.
For a full discussion see investopedia - discovering open interest

practical

Two Institutions, FundOne and FundTwo, intend to open 5000 positions FundOne long. FundTwo short.

in examples 1 through 4 there is no "head on" contention.

example 1
Both Institutions meet for breakfast and agree to take the other side of each other.
They agree on a price, and handshakes are the order of the day
Result. Two satisfied customers. No market contention. Supply/Demand equilibrium.
Net supply demand is zero

example 2
Both Institutions place their orders - on the open - simultaneously. Done
Result. Two satisfied customers. No market contention. Supply/Demand equilibrium.
Net supply demand is zero

example 3
Both Institutions place their orders - by arrangement - simultaneously. Done
Result. Two satisfied customers. No market contention. Supply/Demand equilibrium.
Net supply demand is zero

example 4
InstitutionOne executes long in the AM, and commences buying program. Done by Midday.
Result. Market rises all morning. And comes to rest on completion of the program.
InstitutionTwo executes short in the PM, and commences selling program. Done by close.
Result. Market falls all afternoon. Comes to rest on completion back where it started the day.
Net supply-demand at 12:00pm is +5000
Net supply-demand at 04:30pm is zero
Net supply demand curve is a positive parabolic curve.
Reverse the order of execution, and Net supply demand becomes a negative parabolic curve.

example 5
Both institutions place small orders, 5 lots at a time progressively during the day. All day.
Teasing one another, looking at one another, but still doing business.
Net supply-demand at 04:30pm is zero
Net supply demand curve is a flat line.

example 6
Both institutions place small orders, 5 lots at a time progressively during the day. All day.
Teasing one another, looking at one another, but still doing business.
InstitutionOne takes a break at 11:00am for an hour.
Unless InstitutionTwo takes an identical break, there will be contention in the market.
InstitutionTwo is the seller. InstitutionOne, the buyer has disappeared. Creating a vacuum.
Price must fall. Reverse the order of the time break and price will rise.
Net supply-demand at 04:30pm is zero

stealth trading

algorithm trading

Machines are taking over - and they're not using charts algorithm trading