Trading Points of View
Over the weekend, I had a chance to reminisce about the classic movie Trading Places. I’m old enough to have witnessed the transition from pit trading to electronic trading, yet I was classically trained to seek—or prepare to seek—the very phenomenon of sentiment shifts depicted in the movie, but in an electronic trading format.
To this day, efforts to truly capture that phenomenon have never fully replicated what many floor traders highlight as the raw emotion that allowed them to legitimately harness the “wisdom of the crowd” or the smart money.
Yet, as empiricists, we must think critically to solve this problem. For example, if there were still floor traders today, measuring a few key data points could be extremely interesting. Consider the decibel levels of the pit—akin to the noise in the movie—correlating with peak liquidity, which is also measurable.
Even something as simple as a sports watch tracking heart rate and perspiration could help quantify this raw emotion, linking physiological responses to the bids and asks occurring over time.
This idea ties directly into Auction Market Theory (AMT), which suggests that markets operate as continuous auctions where buyers and sellers interact to determine fair value. In a live trading pit, the ebb and flow of noise, physical energy, and collective trader sentiment provided real-time signals of market imbalance—essentially a raw, unfiltered version of order flow.
No school of thought in investing or trading can—or should—refute that Auction Market Theory (AMT) has had the most impact on asset class pricing over both long- and short-term durations.
Consider this: if you were to go to a Christie’s auction, you would understand that my sports memorabilia assets have a story. You can even add to that story—in fact, you can share the latest developments of it. Yet, it is the auction itself that facilitates the process of buying and selling the asset - settlement.
Someone knew something about today’s CPI and how the market would respond. Not only did it make new lows on cash futures today after the initial algo spike, but the intraday session also made new lows after I emailed you at 10:16 am EST. The bounce from those intraday lows has now exhausted itself at a midpoint fair value.
This is the power of understanding the market auction