Flow Imbalance
For a more general overview of various pricing skews please see
Flow imbalance can be an alternative/complementary technique to Liquidity Reduction. It can improve PnL by $5-50/M or more. Flow imbalance exploits retail sentiment and herding.
FLOW IMBALAnCE SKEW Benefits
- Flow Imbalance can add $5-$15/M to the amount of money B-Book brokers make on their flow. It is a value that scales with the trade volume they do.
Flow imbalance skew & PRICING B-Books
We spend a lot of time researching, developing, assessing new features for inclusion in our pricing & trading signals. We typically evaluate them and assess their efficacy against where the price will be in 30, 60 or 180 seconds time. This is a core part of our predictivity framework.
However, for retail trading books another style of analysis can be helpful. What methods can we use to not predict where the price will be in 30, 60 or 180 seconds time, but what will predict the imbalance of flow (i.e. will there be more buyers than sellers in 30, 60 or 180 seconds time).
If we're able to do that well, we can skew our rate to make it more expensive for the higher volume side and cheaper for the lower volume side and capture more spread relative to a clean mid, whilst also showing a very tight spread to customers with zero slippage.
These kind of techniques exploit the herding rather than predictive nature of retail flow
This technique makes for more PnL being generated regardless of risk management technique used.
Comparative Skew Style Commentary
A large B-Book position can take weeks or months to build up from flow.
Consider the scenario, where retail sentiment has built up a large position in say USDJPY. Then they reverse their decision and want to go the other way. Risk inventory skew makes it cheaper for them to exit their position.
Flow imbalance skew is more responsive to retail herding. Risk inventory skew is not very responsive
SIMULATION Support
Simulation support for applying various skew strategies within the Value Add Simulations. We're able to fine tune a strategy ahead of risking any capital. Track the cumulative PnL of B-Booking trades at their actual price vs different skew styles and sizes to help understand the value it can bring and fine tune the configuration.
Compass Product Support
We also have the option to perform real-time skew analysis within Compass.
We can produce comparative B-Book PnL assessments of what would be the mark to market of trades if they were B-Booked with and without skew.
This is made available within the Trading Dashboard. Please contact Mahi to explore more.
Skew Sizing
There is some consideration to how much you skew. You have to be careful that you are not exposing arbitrage opportunities to clients. Note that even a single price increment can add 5-8$/M on the value of your flow.