Equity markets have become dominated through the years by large mutual funds, hedge funds, pension funds, endowments, and other institutions whose size requires them to make investments in large transactions, straining the capabilities of traditional market-making mechanisms.
Block traders and volume market-makers serve as dealers in large block transactions in both stocks and Exchange Traded Funds (ETFs). They provide the market liquidity necessary to allow the portfolio adjustments demanded by their big fund clients.
In most actively traded issues, block traders are involved in well over half of the volume activity. Currently there are more ETF shares being traded than individual stocks. A shift in portfolio management practices is taking place at this time.
Very few blocks can be "crossed" where the market of the moment can absorb the entire order. The dominant number of block trades result in a "stub end" of shares, long or short. To complete the trade, the market-maker takes that stub onto his or her own at-risk book -- but not without buying price-change protection insurance.
Since the cost of that insurance comes out of the trade's spread profit potential, market-makers strive to not buy unneeded protection. Over the years they have built information gathering systems worldwide to keep themselves instantaneously up to date on changing circumstances. Plus, they are constantly aware of the order flow, issue by issue. They may be the best-informed players in the game.
What they are willing to pay to be protected, or what the proprietary trading desks of other market-making firms demand to be paid for the protection, tells the story of their near-term appraisals for the price of the stock or ETF in question.
Peter Way, co-founder of Institutional Insights™ has developed a behavioral analysis method for determining and tracking the block market-makers' forward-looking price forecasts for individual stocks and ETFs. Those forecasts are frequently asymmetrical regarding near-term upside and downside prospects.
The data and analysis provided through our service are based on the aggregate price expectations across the entire community of block traders and market-makers. These are their collective forecasts, derived from their own competitive purchase and sale of price protection insurances.
No better ETF price forecast estimating method or approach is known to exist.