"Can I use this volume discrepancy to create a profitable strategy?"

Robert B. asks a great follow up question to my post from a few days ago describing the volume discrepancy you see across data providers (name used with permission):

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Robert B.:

To follow up on Don's question:  I wonder what sort of opportunities there might be in comparing the differences between those volume figures.  Could there be a strategy that triggers and profits when there is a greater than normal difference between them?  How would one reliably test for that?

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Dave:

I like the way you're thinking, Robert!

At first, I was pessimistic about this, but the more I think about it, I can imagine a situation where it could be predictive.

Here's how I would tackle this.

You'd need a feed for both volume counts, so you can include that in a backtest.

There are ways to include this in Amibroker, but it's for advanced users only.

A better way to do it is to merge the data into a backtest CSV file as another column.

So you'd have two volume columns, one that includes the odd lots and sub-100 share trades, and one that doesn't.

Then add another column as a ratio of these two volume columns (call it volume_discrepancy_ratio or something).

Now you've got another column that you can optimize on in your column library.

For each of your strategies, run it through the Strategy Cruncher and see how this column affects the strategy.

Different values for this ratio could measure the breadth of participation in a move.

Thanks for the idea, Robert, and for sharing it with the group.

(Robert is trying to broaden his network and asked that I share his LinkedIn - feel free to connect with him.)

-Dave

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