For decades, market makers on the floor traded based off 'paper' - orders from hedge funds, banks, and other major institutions offering highly accurate signals for setting up trades. Firsthand access to this 'institutional order flow' gave floor traders an 'edge' over retail customers, but this would give way with the rise of high-frequency trading.
Traders on the Chicago Board Options Exchange floor and elsewhere devised systems to trade this order flow, known as 'unusual options activity.' By carefully watching brokers carry client orders into the pits, traders could follow only the highest probability trades with the best risk-reward setups.
Why is this strategy so successful?
Because no dark pools or third markets (means of off-exchange liquidity estimated to account for up to 30% of daily stock volume) exist for options, reading order flow is an excellent gauge for investor sentiment and money flow. Unusual options activity can also serve as a precursor to market-moving events - major announcements, rating changes, even takeover acquisitions.
After leaving the floor, our traders realized it was still possible to read 'order flow' with sophisticated technology only used by major Wall Street trading desks. Doing so necessitated strict mental discipline, requiring one to watch 2,000 orders quickly move across a screen in extremely small print. To isolate a handful profitable signals each day, one needed to quickly apply mental filters - a daunting task for even the most experienced floor traders.
We recognized there had to be a better way, and began to explore ways to make this technology more accessible to self directed traders and investors.
An attempt using a team of quantitative developers from a Chicago-based hedge fund went to full beta-testing in Summer 2013, but the venture was dissolved after it failed to produce a satisfactory product.
In early 2014, our traders partnered with a team of institutional traders and developers and were successfully able to automate 12 years of filters and analysis taken from the trading floor.
After extensive development and testing, this criteria for reading order flow was converted into a series of triggers for real-time signals, creating OptionHacker.
OptionHacker was officially launched on July 14, 2014.