V.6:9 (318-321): The trade facilitation factor by Donald L. Jones

V.6:9 (318-321): The trade facilitation factor by Donald L. Jones
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The trade facilitation factor by Donald L. Jones

A cardinal rule for traders using the Chicago Board of Trade's daily Liquidity Data Bank report is to avoid markets that are not "facilitating" trade. Over a period of days, such markets are characterized by decreasing volume, a narrowing of the trading range and an increasing number of Time-Price Opportunities (TPOs) per tick. Sometimes market changes are gradual; so gradual, in fact, that even an expert might have trouble recognizing the shift from trade facilitation to non-facilitation.

For the average trader who must distill a market overview into a trading decision at a particular point in time, a quantifiable, measurable way of determining the level of trade facilitation at any time could be very helpful. Recent research at Commodity Information Services (CISCO) indicates that by using two within-the-day variables—TPOs and ticks—it is possible to define a reliable measure of trade facilitation as the trading day unfolds.

The Trade Facilitation Factors (TFFs) in Figure 1 are based on the cumulative, daily TPO count. The TFFs in Figure 2 are based on cumulative tick count and provide a cross-check on the TFFs determined by TPO count. Figure 3 calculates TFFs according to the ratio of TPOs to ticks and serves as a third reference.

These TFF tables can be generated by hand, although the large number of strictly arithmetic operations makes it more convenient to use a computer spreadsheet. To build Figures 1 through 3, we started with 210 days of T-bond Liquidity Data Bank (LDB) reports from mid-October 1986 through August 24, 1987. Over that time frame there were both up and down markets, quiet markets and very active markets. Any other period would have done as well, so long as a variety of market conditions and activity levels were covered. As time goes by, adding more days to this study will foster some modification. However, because of the broad database, large changes seem unlikely and Figures 1 through 3, as given, will probably be valid for quite a while.

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