Deciphering Unusual Market Activity with AbleSlice

Use AbleMarkets AI to see the dark pool activity

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This article was first published by AbleMarkets

December 20, 2023, was shaping up as a very ordinary trading day in the U.S. equity markets. Then something concerning happened in the last hour of the day: the S&P 500 ETF plunged from $475.00 at 2:15 PM down to $469.71 at 3:05 PM. While the drop accounted for just 1% of the market value of SPY, many market participants took to social media to express their concerns about market stability.

A new product from AbleMarkets, dubbed AbleSlice, is an AI-driven construct that allows us to estimate changes in the buy and sell liquidity in the markets. The product is available in both hourly and minute-by-minute resolutions. AbleSlice measures aggregate liquidity for a given financial instrument across all markets, a fair assessment given that all liquidity pools in the individual markets are continuously cross-arbitraged by High-Frequency Traders (HFTs, see “High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems”).

Figure 1 shows changes in available sell liquidity on the day of the sell off, December 20, 2023. The chart shows the markets were able to absorb the selling pressure from roughly 1 PM to 1:30 PM EST, but then the surplus selling liquidity continued to accumulate.

Usually, the sell-offs like these are met with market makers’ buying activity. AbleSlice tracks that as well. As shown in Figure 2, market makers appear to be accumulating buy positions in SPY leading up to the time of the sell flow (circled in red). Indeed, the buy liquidity accumulation was evident from 9:30 AM on December 20 and continued right until the beginning of sell off.

Why is this significant in any way? First and foremost, AbleSlice liquidity analysis allows us to predict upcoming, seemingly out-of-nowhere sell-offs and rapid short-term rallies. How does AbleSlice work? Many large traders, most often coming from large pension funds and other institutions, negotiate transactions with their market makers well in advance of actual trades. Thus, when a large investor wants to sell a very large block of shares, the investor reaches out to his designated market makers.

The market makers are firms often deploying variants of high-frequency trading strategies to nimbly build up positions to meet the large investor’s market needs. Usually, such position build-ups happen in dark markets and are designed to “blend-in” with the overall market profile. The market maker continues to accumulate “inventory” until the large investor comes into the same dark market with his large order. The large order can be a buy order or a sell order. When preparing to match a large buy order, a market maker incrementally builds up a large sell position, reflected in AbleSlice “dark sell liquidity”. When preparing to match a large buy order, the build up of a large buy position takes place, reported by AbleSlice as “dark buy liquidity”. AbleSlice identifies the dark liquidity pools on the minute-by-minute and hourly basis using proprietary Artificial Intelligence (AI) models previously described here.

In summary, when investors have the right set of tools like AbleSlice, the sudden drops in prices are no longer sudden, but predictable instead. AbleSlice data is available for all U.S. and European equities, commodity futures, foreign exchange and crypto currencies. Reach out today to start your 1-week trial.

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