Thread by @dampedspring

Flow 101 - Flow moves markets. If you know of a market moving flow before it hits the market or you know that a market moving flow is about to end you can make money in markets if, and this is a big if more most, you know about market moving flow and others don't. Some musings.

The best way to know about a market moving flow is to literally know before it is sent to market. There are people who became billionaires by colluding with sell side Wall Street firms who would disclose market moving orders they held from large "Boston based Fund" I saw it.

It's called Front Running and anybody who lived through the 80's and 90's can tell you stories. To this day one form or another exists. It is illegal BTW. But that's not what this thread is about. I mention it because front running is flow trading just not the illegal part.

Flow trading is the legal anticipation of order flow by examining public data. It is NOT actually knowing about order flow. That's the illegal part. I have thoughts on what may happen in $TSLA due to Elons selling but I do not "Know" if he's selling today.

I have thoughts on what @JPMorganAM will do to roll their collar but I don't "know". The information about the actual order is unknown until it hits the market. Flow trading is anticipating the flow through examining various patterns in public data. Get it. Good. Moving on.

The number one mistake when predicting flow is being one sided in your thinking. A naive soul at BNP was quoted in Barton's over the weekend that 1TN of equities need to be sold and 1TN of bonds needs to be bought to rebalance global portfolios. Does anyone see the issue?

Let's ignore price for the moment. Let's assume that could magically happen without a price change. All of the sellers of stocks/buyers of bonds would be back in some rote historic balance. But who bought/sold? What would their balance be?

The global market portfolio at this very second is by and large at equilibrium thats why the price is what it is for every global asset. Every asset is owned by someone. At the margin someone covets that asset and wants to buy and someone who owns that asset is ready to sell.

Now some important things to consider in predicting flow. First, who needs to change their position and why. The motivated seller (let's say). Must pay a concession (lower price) if they want to motivate a buyer. Note: after the trade the seller has cash and the buyer needs cash

Post trade now the seller uses the cash to buy something, either another asset 🧐, payoff debt (that's another asset to someone) or consume. Post trade the buyer needs to borrow, (that's a new asset for someone) of sell an asset. The motivation of the original sale is absorbed

Second what is motivation. This motivation is critical as the strength of motivation defines the willingness to accept price concessions to get out. The level of price inelasticity is at play.

The Fed is entirely price inelastic when buying QE bonds. They accept what is offered. The US Treasury is price inelastic at auctions. They accept what is bid. Elon Musk has some elasticity to sell his 10% but it's coming for sale this year. He can play games to get a price but.

The order is on the desk. Tax planning generates uneconomic decisions for the general investor but strong motivation for individual tax payers. Portfolio rebalancing is a decision. If it is triggered by specific rules and investor mandates it generates predictable inelastic flow

We all watched $TSLA a year ago yesterday. When index funds by rule must buy a new constituent that is inelastic flow. See red circle

What are some other inelastic flows. Intraday stop losses, margin calls, levered investor blow ups due to performance. Are often violent motivated selling. Vol targeting funds shifting their vol, hard benchmark investing rebalancing at month end, CTA' momentum models pivoting.

Performance chasing, soft rebalancing, negative performance redemption flows. These are all flavors of predictable flows. Some that are optimized to minimize concessions paid others that are highly inelastic.

When studying each of these flows it's also important to evaluate the level of elasticity on the other side of the trade. Perhaps an inelastic flow on the big side matches. Wow no price impact no concession either way. Perhaps money and credit is tight making it difficult

For the other side to buy without a big price concession. Perhaps money and credit is easy and lots of capital is deployed to find forced selling and get paid the concession. Perhaps people have predicted the coming flow and now are dependent on it coming or they will become

Inelastic buyers. They call this situation a short squeeze. It is complicated.

Process.
Predict an inelastic flow based on a trigger
Predict the size of that flow
Predict what flexibility and what games the player can do to get done
Predict the conditions of the other side of the trade.

It is also useful to predict long term flow. But that's another thread. But in addressing the 1TN needing to be sold by year end. That is naive. There is no trigger. The global portfolio is becoming more long equity for many not changing reasons. 60/40 is not a trigger.

Trading short or long based on a soft trigger such as this is not going to deliver alpha. It is worth studying how the market portfolio will evolve and what is rich/cheap but TBC no professional without a hard benchmark is going to dump equities and BUY BONDS and pay to do it

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