The Research Hub: Intraday Liquidity Provision
Intras
Trading occurs on all time horizons and it is fundamentally about providing liquidity. Different players on different time horizons execute their trades. What you need to recognize is that the intraday timeframe is HIGHLY competitive. Fundamentally, you have all the HFT algorithms you can’t compete against unless you have a latency edge (latency edge is SOOO expensive and unless you are at a high-level firm, you don’t have one!). And then you have all the institutional players operating on a long-term time horizon but are using intraday moves for taking liquidity.
I have written articles on these ideas already that can be found here:
And here:
If you really want to learn about systematic intraday edge or have some type of allocation to it, check out
. These guys are some of the best out there in capturing alpha.In this article, I want to focus on one thing: HOW liquidity provision works
If you are manually running intraday trades (which I strong discourage) then you are functionally providing liquidity for other players’ execution. It’s very rare for a macro edge to express itself intraday. However, let’s just say you are trying to get better execution on your higher timeframe strategies.
Here is a visual that is incredibly helpful:
Here is the PDF of the book. Probably one of the best technical books on liquidity and market microstructure I have ever read:
The main idea from the visual above is that if a large player wants to execute in size, they have two options: 1) trade against another player (or players) who has comparable size AND wants to transact at the same moment. 2) Move the price until they get their fill or attract other players to come in and take the other side.
While this is an oversimplification, this is a helpful framework because it contextualizes how you should think about price in an intraday session. There is a reason we see mean reversion when we move closer to a cash equity open or close that will have more volume transact. For example, if intraday there is a large deviation to the upside or downside on low volume, as you move into the close, you will have more volume begin to appear. This could cause the price to begin mean reverting (or slow its directional movement) because there is more volume to transact against. If this doesn’t happen then it might actually speak to the durability of a short-term move.
The main idea is you want to break down a session into its different parts where the most volume transacts. Then between these periods of time, you can have a clearer understanding of the liquidity provision mechanism that is taking place.
Again, I hesitate to talk about this because there are so many qualifications. On top of this, there is so much additional work you would need to do before actually trading flows like this.
I have read all of the papers and books referenced in the bibliography of the book above (and more SSRN papers I care to admit). After all of that and even building many intraday trading systems, I don’t run any manual intraday trades. I just don’t think it’s worth my time or mental energy. I share this because I see a lot of people trying to day trade when in reality they should probably develop a specialized skillset and try working for firm. You’ll likely make way more money but everyone needs to find their own path.
As always, feel free to reach out via email or Twitter DMs anytime. I always enjoy interacting with you.
Keep learning!
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