What you see, isn't there
Vol #229: June 12th, 2025
Raise your hand if you enjoy flying.
Sure there’s the five year old’s excitement about crossing through the clouds, and the opportunity to watch unlimited Bluey. Or the glimmer of prestige you might feel seated in a premium cabin, toasting takeoff with five dollar prosecco in a flimsy plastic glass.
But for the most part it’s tedious. Life is about the journey, except when you’re actually traveling, and it’s literally all about the destination.1 The airport Bloody Mary wouldn’t taste as good if you didn’t just go through TSA screening.
But it is one thousand percent worth it. As much as I love my home and the awaiting projects, the thrill that comes from experiencing new foods or seeing old friends makes it all worth it. Even better when it’s both.
I’ve had the good fortune this past week to be celebrating a wedding in Scotland - with all the kilts and haggis you’d expect. Castles are awesome. It was an exceptional affair, where each gathering brought more joy and outpouring of love for the bride and groom.
To their credit, people came from far and wide to celebrate. And while all grievances washed away upon arrival, there were the usual amount of travel hassle stories. No matter how many frequent flier miles you have in the bank (Financial Advice - spend them), every passenger knows to expect a delay or two.
The most predictable feature about the tightly coupled and complex air travel system is that you’ll spend longer in Charlotte than you were planning on. Or Chicago or Philadelphia. Delays happen every single day.
We as consumers have chosen that. Airline travel is one of the cleanest examples of actions that speak louder than words. Everyone wants more legroom, but when dollars vote they choose the cheap seats in the rear. Over the long term, costs have come down significantly, and more destinations than ever are available.
The seasoned traveler knows that the only edge in observing this pattern is emotional. Showing up late because of the inevitable delay will cause you to miss the on-time departure. Events planned for shortly after arrival are equally guaranteed to get scrambled. The optimal solution will always be sub-expectation. (Except the Delta Shuttle from the Marine Terminal at LGA, RIP.)
Pattern matching is satisfying because that’s what our brains are designed to do, but it also has the potential to provide significant rewards. In financial markets if you can correctly buy or sell into the next tick, candle, or end of week price action, both the destinations and journey get quite a bit more luxurious.
Predictably timed flow has been analyzed since before Dow built his first index. Closely watched are seasonal effects like the Santa Claus rally, or the end of quarter swooning that comes from large options rebalances.
The most recent example of this is the patterns seen in daily activity. Last month when discussing 24/5 trading (Does Anything Good Happen After Hours?) I posted the below chart from the CBOE showing the intraday volume profile. All those little blips have created quite a bit of discussion since - many with an eye towards exploiting the opportunity from predictably timed automated flow.
Paraphrasing some of the commentary I’ve seen, there are two main thoughts about the impact on market structure. The first is that concentration of activity will distort the pricing of the options by traders who are price insensitive and/or don’t understand the higher level greeks of their positioning. The second is a concern for flash activity, where a deluge of algorithmic orders swamps liquidity, and to defend against this dealers will price the average spread slightly wider.
Addressing both of these at once - this activity is a very good thing and will have positive externalities for all participants. Whether it’s from a bot or from a mobile app, any increase in buy side flow will enrich the information quality of markets and better price options contracts.
Further, even if this opportunity was exploitable by a trader whose revenue isn’t proportional to volume (i.e. the structural alpha participants of exchanges, liquidity providers and brokers), the very act of doing so serves the exact purpose of markets in the first place.
Whether you call them bots or algos probably depends on your clearing category, but the intent is very much the same. Computers can read the feed and react much more quickly than humans, and they can help by placing orders automatically according to systematic strategies.
Thanks to customer friendly interfaces like my friends at PeakBot, or Python libraries for the more intrepid, creating strategies is pretty easy. That means the first ones are going to be pretty naive, like selling 0DTE options every day at 10am. Without any indicators, that’s going to land you in a situation that’s similar to what happens from rotely writing TSLA calls.
But pardon my Scottish, traders have been actin’ like daft eejits since before puts were listed. Technology doesn’t change that. Markets are built such that no matter how “naive” your strategy is, you’ll get the best fill possible. The other side makes a living by competing to interact with you, not scam you.
Almost by definition, retail orderflow is trading activity that does not move markets. Rather it contributes to their robustness, keeps spreads tight, and fosters liquidity.
The fact that these trades are insensitive to second order greeks is irrelevant. They’re playing a game of dollars and cents, and the mechanisms that route this orderflow create far stronger competitive dynamics through auctions and execution quality management.
Rather than drive spreads against themselves, having a predictable signal that non market moving paper arrives at a certain time looks more like the self-identifying power of payment for orderflow. Flying the customer flag attracts multiple counterparties.
Trading through the original Flash Crash (unless you count ‘87) was a formative experience that piqued much of my curiosity in order routing. The cascading deluge of offers was unlike anything we’d seen; and as with every other market blip or error, was most profitably traded by those with a firm grasp of the art of liquidity, not the science of gamma, let alone vanna.
When computers are responsible for making decisions, they simply keep executing the loop. Even humans are susceptible to this, which is a major reason why exchanges have introduced circuit breakers. A little bit of a time out to cool down helps everyone digest “what’s real.”
Even if we achieve AGI in our lifetimes, I don’t know that it will help this dynamic. Structural market participants necessarily trade on a short horizon, and have strong incentives to be the first mover. Intraday volatility is likely to persist and has paradigm shifted higher. If you’re playing the “Vanguard and chill” patience game this doesn’t matter.
Importantly however, it’s volume that moves prices. And volume is a significant part of liquidity’s diet. I don’t want to minimize the adverse effects of a blip here and a gap there, but rather emphasize that this is an important part of creating robust and deep markets.
An old joke about VIX positioning was that you always wanted to be short calls, because if those were losers than your day trading would more than make up for it. Not only will all the little pennies collected in calm times help cushion the blow of a position loss on a gap, but a open PnL is not top of mind when there’s a volume burst from the market move that pumps the VIX.
The predictable spikes of volume at the top and bottom of the hour are neither a risk nor an opportunity, they’re just markets being markets. The surge of short dated trading is driven by retail, whose orderflow provides the context and economics to price volatility incredibly well.
While every pattern has some underlying meaning, it doesn’t necessarily mean you can optimize around it or change your behavior because of it.
I previously compared the upticks to an echocardiogram, and that’s exactly what they show. The beating heart of pricing and markets working in real time.
Signing off from EDI. Hopefully my flight lands on time.
