Allegory of the Cave, Order-flow and Price Discovery

There is this interesting story called “Allegory of the Cave” by Plato.

The story in a way describes what happens to people when they are blinded by a context and fail to see the world outside of it.

I was reminded of it as I saw my twitter feed yesterday.

Instance one below

Next one here

Both the posts allude to the idea that

a) We spotted big buying at that level thanks to Orderflow.

b) Big buying led to the turn in the price.

Point b) is the key. One needs to get an handle on that, and one needs to ask fundamental questions there.

So the question to ask is -

Did the buying happen because the price turned or the price turned because the buying happened?

Yes, that question sounds a lot like Socrates’s Euthyphro Dilemma.

But let me not deviate.

Back to the question.

“Did the buying happen because the price turned or the price turned because the buying happened?”

To answer this question we will turn to what the researches say,

The idea is to understand the location of “Price Discovery” - If price discover happens in the Futures, then we can say - Price turned because buying happened.

However, if the location of price discovery happens to be Spot/Cash market, then it’s the other way round - Buying happened because the price turned.

So what’s the case with NIFTY, where does Price Discovery happen in NIFTY - Spot or Futures ?

Read this post for the evidence - https://www.niftyscalper.com/blogs/2019/1/21/lead-lag-volatility-spillover-effects-some-evidence-from-academic-literature

Kavitha and I will talk about it in our upcoming Explainer tomorrow.

As I sign out - Don’t for heaven’s sake look at the shadows and imagine a non-existing world.