Weight of Flow

One of the first articles I wrote for this website detailed the concept of Weight of Money (WoM). At the end of the article I made reference to another concept, Weight of Flow (WoF). Quite a few people have asked for more detail about Weight of Flow, which this article will cover.

As discussed in the original aricle, WoM is a measure of the desire of traders for a better price. An offer is placed onto the order book in the hope that another trader will take that price by "crossing the spread". If the trader is not happy with the prices available then they too can place an offer on the side of the spread on which they wish to transact a trade.

At any time an order book will contain offers at prices traders are willing to trade at. Other traders have the option of taking a price (crossing the spread) or placing an offer of their own, in the hope that someone else will cross the spread. With BetDAQ now offering discounted commission rates for people who place offers rather than crossing the spread there is money to be made from judging the optimal price to trade at.

An order book allows for price discovery such that people trade at a price they feel is fair for them. A large quantity of trades leads to the Wisdom of the Crowd whereby prices settle near to the fair prices that the market has decided upon with all public and private information discounted into those prices. Hence, we get the concept of the Efficient Market.

Some people use WoM to judge market intent by looking at the amount of money on either side of the spread to determine which way the market will go. The problem with this is that some volume, a tick or two away from the spread, may never be traded and might be intentionally placed there to skew any measure of WoM and mislead naive traders and bots.

With WoF you are measuring the actual trades placed and the price at which they are transacted. There are many ways of doing this. You could have a bar chart showing the volume traded at each price. All third-party trading software will show this, one way or another. The current peak on the chart (or largest number, if represented numerically) will be the place where most money has been transacted and will be at the price that most money has "comfortably changed hands". In other words, the flow of money has least friction at that price.

Another way of measuring WoF is by VWAP (Volume Weighted Average Price) and is discussed in my book, Programming for Betfair, along with program code to determine VWAP automatically. With VWAP you are measuring the average price by weight of volume at each price. This figure may or may not give a figure that is equal to the price at which most volume has been traded, depending on the range of prices that have been traded at. A wide range of traded prices could well have a VWAP well off the median traded price and be indicative of a price trending towards a new price.

Below, we see a typical trading ladder. Most volume has been traded at odds of 6.0. Just looking at the Traded Volume suggests that VWAP is a little over 6.0. The WoM indicator reads 52.09% in favour of backing so not a lot to be read there. The Last Trade column shows volume being taken recently at 6.0, 5.9 and 5.8. There are triple figure offers on the back side and other than an immediate triple figure lay the rest are double figures. What does this all mean? Is the price trading at its low and will bounce back up? Is this a potential breakthrough move to much lower odds? Or will the price remain around 5.8/5.7 spread for some time? Well, it's certainly a lot of hard work for the asute technical trader.

In summary, WoM is a measure of intent, although that intent might be hidden by large sums off the spread being used to camouflage actual intent on another exchange, bookmaker or later in the life of the market. Because of that WoM is not a perfect leading indicator. WoF is a measure of what has already been traded and is therefore a trailing indicator, which may show momentum in the market towards a new price.