Inferring Latent Market Forces: Evaluating LLM Detection of Gamma Exposure Patterns via Obfuscation Testing

TL;DR

This paper introduces obfuscation testing to evaluate whether large language models can detect structural market patterns like gamma exposure through causal reasoning, demonstrating their emergent capabilities in financial analysis.

Contribution

The study presents a novel obfuscation testing methodology and shows LLMs can identify complex market mechanisms without relying on temporal cues or profitability signals.

Findings

LLMs achieved 71.5% detection rate with unbiased prompts

Detection accuracy remained stable at 91.2% despite profitability changes

Detection increased to 100% with regime labels

Abstract

We introduce obfuscation testing, a novel methodology for validating whether large language models detect structural market patterns through causal reasoning rather than temporal association. Testing three dealer hedging constraint patterns (gamma positioning, stock pinning, 0DTE hedging) on 242 trading days (95.6% coverage) of S&P 500 options data, we find LLMs achieve 71.5% detection rate using unbiased prompts that provide only raw gamma exposure values without regime labels or temporal context. The WHO-WHOM-WHAT causal framework forces models to identify the economic actors (dealers), affected parties (directional traders), and structural mechanisms (forced hedging) underlying observed market dynamics. Critically, detection accuracy (91.2%) remains stable even as economic profitability varies quarterly, demonstrating that models identify structural constraints rather than profitable patterns. When prompted with regime labels, detection increases to 100%, but the 71.5% unbiased rate validates genuine pattern recognition. Our findings suggest LLMs possess emergent capabilities for detecting complex financial mechanisms through pure structural reasoning, with implications for systematic strategy development, risk management, and our understanding of how transformer architectures process financial market dynamics.