Lesson 6 – The Reconstructed Tape

This short lesson discusses the Reconstructed Tape. First, it’s important to realize that the information on the Summary Tape/Depth&Sales is also on the Reconstructed Tape. You can see the same trades, you can see the same prices, you can tell where the inside bid/ask is, you can see when price ticks up and down. The format is different but the things we mentioned in the Summary Tape/Depth&Sales lessons can be seen on the Reconstructed Tape. In thicker markets with a higher volume of trades and less price movement, the Summary Tape/Depth&Sales is easier to read. They are, after all a summaries and the more there is to summarize, the better a summary will be.

The advantage of Reconstructed Tape is in being able to track large traders. As such, I find it useful alongside the Summary Tape/Depth&Sales. My main focus is on the Summary Tape/Depth&Sales but I will not trade against aggressive large traders. I am also aggressive myself, with fairly close targets and so I am not waiting for large traders to join my trade.

Aggressive vs Non-Aggressive use of Reconstructed Tape

The basic concept of the Reconstructed Tape is to allow you to track BOTH small and large traders. The term ‘large’ is subjective and depends on the market. We don’t see 1200 lot trades on the CL but they happen multiple times a day on the ES. The Summary Tape/Depth&Sales may show 1000 contracts at market but only the Reconstructed Tape will tell you if that was many small retail players or 1 large institutional player. If many of small traders are selling, I’d be more inclined to trade against that than if one large trader is selling.

Your own level of aggressiveness comes into play in how you interpret this information. There is nothing wrong with establishing a position when you have confirmed that a number of large traders are with you. This does come at a price. Large traders joining the market confirming your long entry will more than likely have caused the price to tick up. On a thinner market, this might not be a problem because there’s a chance that the normal volatility of the instrument will give you a chance to improve price. On thicker instruments like the ES, you’ll just have to accept that confirmation brings a higher entry price. If you are position trading, holding for longer intra-day moves, this isn’t a problem. If you are a shorter term trader, looking for 6 ticks, then this is going to seriously impact your results.

As well as considering what we see on the Reconstructed Tape, it is worthwhile considering what we don’t see. For instance, if I want to take a long trade on the ES with a 6 tick target, I will consider the absence of large sellers to be favorable. I consider this to be a more aggressive use of the Reconstructed Tape whereas waiting for large traders to jump in is a less aggressive way to use it.

That’s the end of Lesson 6. Click Here to go back to the lesson plan.

Peter Davies