Chicago Board of Trade – Market Profile

Chicago Board of Trade – Market Profile

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Market Profile is an intraday charting technique (vertical price, horizontal time / activity) developed by J. Peter Steidlmeier, trader at the Chicago Board of Trade (CBOT), California, 1959-1985. Steidlmayer sought to estimate the market value as it evolved over the day. The Steidlmeier charts showed a bell shape, thicker at mid-range prices, with activity dying out at higher and lower prices. In this structure, he learned the “normal”, Gaussian distribution, which he met in college statistics (3).

The Graphical Market Profile was introduced to the public in 1985 as part of the CBOT-CBOT Market Profile (CBOTMP1) product (2). CBOTMP1 included new data from the Liquidity Data Bank (LDB); end-of-day clearing identified by the class of traders in the pits ((1) local, (2) commercial, (3) members filling in for other members, and (4) members filling out orders for the public). The profile was proposed as a trading methodology for using this new data. CBOTMP1 touted profile / LDB as a way to “improve performance”. It is described as “the only variable cost ticker service in the commodities industry.”

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The promotional material says the profile should be the link between CBOT data and the market. A graphical profile picture should be used to say “what the market is doing”; the LDB data is intend ed to define the “state” of the market. Within the data mapping connection in CBOTMP1, the price of the peak refin ed volume is identifi ed as the point of control (POC). Following the analogy with normal distribution, central seventy percent of trading activity near the POC (+/- one standard deviation) is call ed the “value area”.

SECTION HEADLINES “CBOT MARKET PROFILE, 1986” ARE:
Using the CBOT Market Profile to Improve Performance
Profile: link between CBOT data and the market
Part I What the Market Does: Market Profile Chart
Part II Market State: Liquidity Databank
application

In 1987, Professor Thomas P. Drinka of Western Illinois University launched the first Market Profile® course in academia. As of 2010, Western remains the first and only academic institution to offer such a course in its curriculum.

A new and expanded 335-page CBOT Market Profile Guide, CBOTMP2, was released in 1991 (5). In this volume, the first five sections are dedicated to profile analysis. The last section deals with LDB data. Unlike CBOTMP1, there is no emphasis on the product’s market profile ticker. In the period 1985-1991, the profile concept gained popularity among the public (in an article by the Chicago Tribune, Steidlmeier was identified as “the man who knows where the market is heading”).

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Steidlmayer and Kevin Koy started the Logic School Bazaar teaching profile trade. CBOT has moved away from marketing the liquidity databank directly to the public (Cisco Futures became their provider). The public access to tick data has expanded significantly so that profiles can be built within the day (the LDB data was still at the end of the day). It was becoming clear that the days of pit trading were number ed. By 1991, it had become apparent that the focus was on the core technology rather than the database us ed to support calculations. Hence the change in emphasis on the profile compared to the LDB data in CBOTMP2.

In both CBOTMP1 and CBOTMP2, “Market Profile” appears in the title, but it is difficult to find a precise definition of what a Market Profile is. Both publications provide many, many examples. A working definition from Mind Over Markets (9) is “the price action of the market recorded versus time in a statistical bell curve”. Added to this would be a price and token definition, “TPO” (time-price opportunity), with TPO defined in CBOTMP1 as: “an opportunity created by the market at a specified price at a specified time.” For example:

101,150 a a = from 08:00 to 08: 29101125 ab b = from 08:30 to 08: 50101100 b = from 09:00 to 09: 29101075 BC e.

The letters represent time as well as position (a in one column, B in the next, etc. A, B, C is TPO (this price happen ed).

SECTION HEADLINES FOR “CBOT MARKET PROFILE, 1991”
Reading the Market Profile chart
Profiles for long term trends
Perception of value fuels market activity
Market profile data and distribution process
Market profile tools to support trading decisions
Analysis of the Bank’s Liquidity Bank Volume

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Volume is said to identify signs of continuation or change in order to infer directional trade facilitation, but “volume data is meaningless by itself.” The reason is that “it is very important to know what the market participants are doing”. Many of the “profile readings” are displayed in both CBOTMP1 and CBOTMP2, allowing you to infer who is trading what and what message they are sending. One method seems to be to see if volume increases up or down throughout the day. It should be not ed that the LDB data discuss ed here is the end of the day. Some time later, CBOT started releasing Glades during the day for half an hour. These clears, compared to the tick data, indicate an approximately half hour delay. It does not explain just how the data lag trade facilitation reading is carried out.

At the start of the day, the first hour of trading creates a range (opening balance). Then, as more information is obtained about the continuation of trading throughout the day, certain chart formations, called day types, are recognized. These formations have names (1), (2), such as “neutral day”, day without trend, day of trend, etc. Another concept, “third standard deviation” or Steidlmeier distribution, was discussed (1), possibly in support for day types. The Steidlmeier distribution begins when the current, equilibrium, distribution goes out of equilibrium (1, p. 175).

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