How Uninformed Order Flow Can Affect Short-Term Trading

Summary

The discussion considers whether short-term directional strategies may work better in markets with more uninformed traders. The response says uninformed flow can be valuable because it is less informed about near-term prices, but does not develop a strategy for measuring that flow or comparing markets. Its practical point is that access matters: brokers may sell order flow to firms that can analyze and trade against it before other participants see it.

The response offers no empirical evidence, market-specific comparison, or method for estimating the ratio of informed to uninformed traders. Its reference to firms purchasing order flow supports the general claim that such flow has commercial value, but the document does not quantify how that value affects spreads or directional profitability. The idea is therefore a market microstructure observation, not a basis on its own for selecting a market or forecasting returns.

Key ideas

• Uninformed order flow may offer opportunities because it carries less information about near-term price direction.
• Access to that flow can be limited when brokers sell it to firms that can analyze it first.
• The discussion does not provide a way to estimate trader-type ratios or compare markets empirically.

Tags

# Short-term directional trading


# Short-term directional trading












Did value of ratio between informed and uninformed traders at market, making difference to profitability of short-term directional trading on that market?

My guess is yes and better play short-term directional on market when is more uninformed traders in relation to informed, because at this market spread will be maintained by market makers on lowest value to possible profits/short-term volatility.

That may be correct or not, maybe someone have other point of view on this question.

EDIT: To simplify, It's possible to make a guess that specific markets can be better environment for play short-term directional strategy based on estimated ratio between uninformed and informed traders at them? And why?

## Answer by chollida (score 1, accepted)

https://quant.stackexchange.com/a/12642

I'm still not entirely certain exactly is the question you want answered.

If you are you asking is "uninformed" flow more valuable than "informed" flow, then the answer is an emphatic yes otherwise funds like Citadel wouldn't pay so much for it. See here for details

The only issue to consider is that will you be able to get a piece of the "uninformed" flow? With most of the brokers selling their flow these days its unlikely that you'd be able to see any of this flow before a fund like Citadel has taken advantage of it.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.