Introduction to market profile

By Peter Steidlmayer, Ted Hearne

Abstract / Introduction:

In the past several decades, a fundamental change has taken place in the commodities markets. The industry has expanded the application of the futures concept to more products and derivatives such as options and indexes, and consequently, the influx of capital into the marketplace has increased substantially. This continuing and sustained growth in the huge pools of available capital has produced profound changes in global markets — specifically, we see great change in the way capital enters the market.

Not only has this influx of capital produced a change in an economic sense, but it has also produced change in a structural sense. Initially, these dollars flowed into the marketplace as a part of its structure, focusing activity in a specific location, which has a historic and familiar time frame. The market’s day-by-day structure represented the activity of a specific group of people trading at a specific location. And historically the pool of capital centered at this location was the dominant factor in the market. Furthermore, the type of trading carried on in this central marketplace was one of price containment – a structure that led to price discovery.

Today, the global capital markets operate around the clock without reference to time and place. At any time of the day or night the marketplace can be inundated with a large influx of outside dollars willing to commit fully to any given situation. These huge shifts in capital have been occurring with increasing frequency over the last decade and a half; it is clear that the future holds a continuation of this development. The result of this change is that prices are increasingly less contained and that local liquidity has lost much of its short-term significance.