Long term investors traditionally focus on macro trends and company fundamentals taken from regulatory filings for decision making, however, this often ignores the significant insights to be gained from analyzing high-frequency data. High-frequency data, such as intraday data or tick data provides a wealth for information for stock analysts.
Information on the Types of Investors
Investors are often interested in the types of investors that drive a stock price move.
Smaller retail investors tend to follow the price moves and so can be indicative of an over-stretched rally which is due for a correction.
By contrast, large institutional investors such as mutual funds often take several weeks or even months to build a position in a stock, which they will look to hold for up to several years.
When looking at end-of-day data, analysts will only have the signal of total daily volume to guide them on the types of buyers in a stock.
In general, analysts tend to conclude that large volumes on significant price moves are indicative of institutional buyers, however, this is a very crude analysis and can be vastly improved upon by using intraday data.
In this circumstance, tick data (i.e. data comprising of each individual trade) will be of more use than intraday bars.
When looking at the tick data chart, large individual trade volumes will be a strong indication of a large institution executing the trade.
It should be noted that activity by buying and hold funds will look significantly different on a tick chart than high-frequency hedge fund traders.
For the high-frequency trader’s large volumes are typically executed as buy and sell orders in short sequence, whereas, funds will tend to execute multiple orders in the same direction (ie either buy or sell) throughout a trading day.
Accurately Estimating Trading Profits
Analysts will often assume that they can trade a stock close to the middle of the intraday range.
Whilst this is often accurate for large liquid stocks, this can be a false assumption for stocks outside the S&P500.
For less liquid stocks, the bid-ask spread on low volume days can be very significant and sometimes span the entire intraday range – in such a circumstance the analyst show estimation an entry price at the top of the intraday range and an exit price at the low of the intraday range.
Unfortunately, many mid and small-cap stocks have vastly different trading patterns and broad conclusions about the size of the bid-offer spread cannot be drawn with reference to the historical intraday bid and offer prices.
Avoiding Liquidity Traps
Analysts will frequently generate trading systems under the assumption that provided they trade within a low percentage of the average total daily volume they can safely trade in and out of a stock without adversely affecting their trading prices.
Analysts may filter out stocks where the volume is very volatile and likely to dry up, potentially leaving them trapped in a position (ie a liquidity trap).
However, using only daily data to estimate volume volatility is insufficient since the daily volume is an aggregate of all the trading volume during the day.
Unfortunately, this volume may not be consistent and stable throughout the day and could consist of a short burst of high-volume accompanied by low periods of low or zero volumes which would lead to the issue of a liquidity trap.
The only way to screen for this is to check the intraday volume bars to see how consistent the volume is for a stock.
Detecting Demand Imbalances
Demand imbalances between buyers and sellers can be a powerful, long-term driver of a stock’s return. Inspecting tick data can give indications as to these demand imbalances.
Long-term investors often want to know if the price movements in a stock are driven by buying or selling orders which would be a strong indicator of market sentiment, however, this cannot be inferred from daily price data which aggregates all buy and sell orders.
One method of doing this is to use tick data to screen for up-ticks (that are usually buy orders being executed) versus down-ticks (typically sell orders), the ratio of buy orders versus sell orders is thus a powerful indicator of market sentiment.
Insider Trading Signals
Whilst insider trading itself is illegal, looking for signals of insider trading (where insiders are trading on knowledge unknown to the broader market) is not, and this is often a powerful signal of future price moves.
Insider trading can be inferred from daily data as price and volume may increase prior to a company announcement or earnings release.
However, intraday data is far more powerful in this respect as the intraday trends can be detected by looking for repeated and consistent buy orders during the day (typically insider’s are not institutions so the orders will usually be low volume).
Estimating Correct Trading Volume
Analysts will often need to know the maximum volume they can trade in small-cap and mid-cap stocks where the daily volume on days they may wish to trade could be low.
This can be done simply by looking at daily volume charts and setting the trading volume at a low percentage of the total volume on a low volume day.
However, this is an imprecise estimate. Far more accurate is to examine the intraday tick bid-ask quotes to determine the intraday liquidity since low liquidity can be misleading as there can be large volumes on the bid and offer but simply few trades that get executed against these quotes.
Filtering out Retail ‘Trend Follower’ Traders
Retail investors (ie individuals trading using brokerage accounts) are often fickle investors, following significant trends and major news or earnings announcements.
They are usually not long-term holders of a stock and so are often considered more as noise versus the ‘signal’ generated when a long-term investor such as when an institutional fund purchase or sells a stock.
From merely looking at daily data, it is impossible to determine whether retail investors are active in a stock.
Tick data on individual daily trades can be a major benefit in this, as retail investor patterns will clearly be shown by the clustering of small volume trades during a short period of time.
Showing Correct Resistance and Support Price Levels
Long-term investors will often be aware of resistance and support levels for a stock’s price.
Although support and resistance levels are mostly used by technical analysts, fundamental traders may use these as they feel secure in purchasing a stock just above its support and may avoid the purchase of the stock is close to a major resistance level.
Resistance and support levels can be determined from daily price data, almost always using a chart and abiding by the rule that the price level needs to be tested at least three times before it becomes support or resistance, and only tests of five or more can be considered strong levels.
Daily data will only be able to show a maximum of one test of a price level per day, however, examining the intraday data may show evidence of repeated tests of a price level giving much more confidence in determining the strength of the resistance or support level.
In summary, although a fundamental analyst may be primarily guided by company metrics or economic macro trends, there is a significant benefit from also examining the intraday trading patterns of a target stock