Effective Volume Calculations with Boundary Conditions

[rah1450]

Dear Pascal,

I would like to thank you for your brilliant book, Value in Time.

In some markets there are some special constraints for price changes for a given day. For example in IRAN stock market there is +-5% price changes limitations with respect to the previous day's volume weighted price average. Consider that today's volume weighted price average for all transactions is 100, then tomorrow the price could oscillate between 95 and 105.

With this boundary conditions for price, if the demand for a company to be high the ask price will be 105 but at this condition there are some times no one to offer his/her stock to the market, i.e there is no supply at that day. We call this BUY QUEUE! The same problem exists on the bad days of the stock which is called SELL QUEUE.

Under these queue conditions, a group of shareholders are in queue to buy or sell their shares. for example consider 100,000 shares are in buy queue. Under this condition how could we calculate your proposed EV as the price can not go higher than +5% but some transaction will be executed?

I mean although the executed transaction volume at the queue does not lead to price change as you mentioned in your book, but this is only because of the boundary conditions imposed on the price and not because of the volume could not increase the price. How should we calculate the EV under such circumstances?

Regards
Ali

[Pascal]

Hi Ali,


I developed the EV method in the year 2000 when the equities pricing came down from 0.16$ increments to 0.01$ increments. This moved the trading pattern from a queue driven book to a liquidity driven book.
This allowed funds to develop trading algos that could detect liquidity and drip release their own orders in order to have their orders executed within the existing liquidity.

EV has been developed in order to be able to reconstruct the original orders before they were cut into tiny slices to be fed to the market. Hence, EV restores market visibility that the queuing method originally offered.

If you come back to a queue driven market like it is the case in Iran, the EV method is not reliable anymore. The EV method needs liquid markets with many participants.

On the opposite, if you only have one very large participant such as the Fed liquidity provider, then the EV method will mainly detect that participant's activities. This is what has been taking place in the current market since the end of February.




Pascal