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Up and Down Volume

by Bill Brower on May 13, 2016 | Categories: Uncategorized |

Up and Down Volume

Market prices are determined by traders issuing market orders. That is to be distinguished from those using limit orders. A trader that absolutely must get filled immediately issues a market order. The market seen by traders is composed of a bid price and an ask price. This is known as the bid ask spread. Market orders always get filled at an unfavorable price by the execution on the opposite side of the bid ask spread. So a market order to buy will be filled at the ask price or higher and a market order to sell short will be filled at the bid price or lower.

If we wish to track volume and distinguish between up volume and down volume we would look to see whether fills take place at the bid or ask prices. So if 100 shares are purchased at the ask price that would be classified as up volume because the trader issued a market order to buy and was forced to cross the spread and get filled at the ask. The opposite would be true for a market order to sell short which would get filled at the bid price and is consequently considered down volume.

Unfortunately this is not how Tradestation looks at up and down volume. The Tradestation computation is undoubtedly unique in the industry. It is probably the result of an effort to simplify the computation in order to deliver prices more quickly because there is no effort to match the trade against the bid ask prices. If a trade goes off at a higher price than the prior trade a switch is flipped to indicate up volume. All volume subsequent to that and prior to a trade at a lower price is considered up volume. This has the convenient result of counting all trades that go off at the exact same price as being up volume. This is in spite of the certain movement of the bid/ask spread wherein trades can be executed at the bid price which would normally be considered down volume but in this case are recorded as up volume simply because no trade has occurred at a price lower than the previous trade. In a similar way, down volume is counted to include all volume subsequent to a trade at a lower price than the prior trade until a trade occurs at a higher price than the previous trade.

The effect of the shortcut taken by Tradestation to categorize volume into their own proprietary up and down volume concept potentially leads to a mis-categorization of most of the volume that takes place on the exchange because by far most of the volume occurs at price levels identical to the prior trade. That said, a trader may still find some use for the up and down volume in the Tradestation format but any trader using it should at least be aware of how it was computed.

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