The previous post was about comparing entropy in prices to entropy in real goods flow, using oil and underwear. Consider the inverse problem, for oil, we kno0w the price baud rate given the quantization error, can we compute the equivalent quant levels for tanker deliveries knowing the baud rate?
This is where we get gains from the analysis, it allows forensic analysis as in discovering hidden illiquidities in the oil market. In this case, obtaining aggregate oil flows, we want to identify that flow by group of oil tankers, exposed by the price illiquidity. We compute price entropy as a 4 baud rate system. We take aggregate oil flow, reduce those to a four baud rate, and look at the y quant levels. We would expect to find a good match between the oil contract size in units of tankers/contract; and the quant levels in Y. Entropy analysis should be a great tool for insider trading and price fixing.
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