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Unfinished Business

By looking at the traded volume in the Footprint we can start to see how the market operates like an auction. At different price levels in different timeframes aggressive market orders consume the liquidity of passive limit orders until we experience Exhaustion and run out of buyers at prices that are too high or sellers at prices that are too low; or aggressive buyers encounter larger sell limit orders (or aggressive sellers encounter larger buy limit orders) with the result that the aggressive trading is halted through Absorption. So the market is auctioning up until we run out of buyers and down until we run out of sellers.

Imagine you are at an auction of classic Ferraris. A particular car has a price estimate of $350,000. Bidding starts at $200,000 with much interest in the room and rises in increments of $10,000 until there is only a single bidder left. The hammer falls and the car is sold at $380,000. This is no different to how markets auction up and down. Price moves up until there are no buyers prepared to pay the offer price. Price moves down until no sellers are willing to accept the bid price.

The Ferrari auction is in progress and the auctioneer is looking for bids at $280,000. Four bidders are interested when suddenly someone shouts ‘this car is stolen!‘. The bidders put down their bidding paddles and the auction stops until proof of ownership can be demonstrated. We have an… unfinished auction! An event happened in our market causing buying interest to disappear yet we had not established the price at which the final buyer was prepared to buy. After a few other completed sales, the auctioneer displays proof of ownership to the room. The auction restarts at $250,000 and the car sells for $380,000. At $280,000 we know that we had not found the last buyer as the car had not sold and there were four interested buyers. By extension, there was a price beyond $280,000 that would establish the last buyer and completion of the auction. 

The traded volume data in the Footprint chart allows us to identify this condition.

At the top of the red bar, when the market was trading at the top two price levels, 2 contracts were purchased using a market order. These was insufficient volume to move the current offer up an additional tick.

By comparison, at the top of the green bar, when the market was trading at the top two price levels, 19 contracts were purchased using a market order. These 19 contracts consumed all of the liquidity at this price level and the market quote moved up a tick. The bar’s top price now became the bid price. 2 contracts hit this bid price (2 x 19) but no contracts lifted the offer (the price level above 2 x 19). We know that the 19 contracts that traded at this price level consumed all of the selling liquidity. We do not know whether there are fewer aggressive buyers than sellers however because nothing traded at the next offer price.

Compare this again to the red bar. The zero print on the offer at the top price level tells us that the market never ticked above the highest price level in the bar. Why not? There were not enough buyers to cause this. We found the last buyer in the auction and the upward auction finished. The green bar by comparison did not find the last buyer in the auction giving us an unfinished auction or unfinished business condition.

Unfinished auctions at significant highs or lows can provide good exit targets as we can understand the reasons why these price levels may be visited again in order to complete the market’s auction process.

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