How does order execution really work? Are market makers "manipulating" prices for Retail Traders?

T

TraderInTheMarket

First of all, I'd like to say I love the forums, I'm a long long-time reader, and a first-time poster.

I have recently come across several YouTube videos and blog posts that explain how market makers manipulate prices to trap retail traders.

I primarily day trade low to mid float stocks with momentum strategies. Everyone who does this knows very well that the charts can get very choppy, and a huge flush candle can come out of nowhere in a split second.

For a while, I've been trying to understand how fluctuations like this can happen so rapidly. I understand that there are algos and automated trading systems, but someone needs "own" a huge block of shares in order to long/short a stock and push it 50 cents in 1 second. They essentially need to wipe out all the bids/offers that are lined up.

I'd like to learn more about the inner-works of the stock market. There are several layers of entities that are involved each time a trade is executed (broker/market maker/exchange/clearing house), and I realized that I am putting my money on the line each time I trade, and I don't really have an idea what's going on in the back end.

This brings me to my question(s):

What role does the broker actually hold?
Are they just the bridge between me and the market maker?
Does it matter whether it's a direct-access broker or a broker like TD/Schwab/Robinhood?

When I buy/short a stock, who am I "actually" buying/borrowing it from?
Is the stock coming from my broker or the market maker?
and do they need to really hold the stock in order to lend it to me, or do they just create a record of it from thin air?

Who controls the price of a specific stock?
I understand the laws of supply and demand, but I keep hearing that market makers earn their money from the spread and they control the price and liquidity...

How does it actually work?

When I place an order to buy at the ask price of $10, someone is selling it to me at that price.

Does the sale occur when there's another seller that's willing to sell the stock to me for $10 (whether it's a retail trader or high-frequency bot)?
Or does the sale occur when the marker maker decides they are willing to buy at $10?

I guess, essentially what I'm asking is, are traders really trading between themselves? Or is this a system where people place buy and sell orders, and the market makers fill the orders if they choose to do so when it's profitable for them?


What is the full flow of a stock, from A to Z?
Assuming I am not buying at the ask price. What is the sequence of events that happen from the moment I click on the buy-at-bid price, through order fulfillment (assuming my order gets filled), until the cash is settled and I "own" the stock?


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I know this is a very long post, and I appreciate any input on any of the questions I posted above. If it's too much for you to type, I'll be grateful if you can also point me to other resources where I can learn more about this.

Thanks!
 
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@TraderInTheMarket i suggest getting study materials for the series 57 or series 63, and take the practice tests. Prop traders require this because they need to cover their ass once they take all their targets loot, but legit institutions use this for their people as well and you will learn the answers to your questions, not tainted by random scribblings of ET posters and their personal experiences. for instance, here is an example practice question

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TraderInTheMarket said:
I primarily day trade low to mid float stocks with momentum strategies. Everyone who does this knows very well that the charts can get very choppy, and a huge flush candle can come out of nowhere in a split second.

For a while, I've been trying to understand how fluctuations like this can happen so rapidly. I understand that there are algos and automated trading systems, but someone needs "own" a huge block of shares in order to long/short a stock and push it 50 cents in 1 second. They essentially need to wipe out all the bids/offers that are lined up.

I'd like to learn more about the inner-works of the stock market. There are several layers of entities that are involved each time a trade is executed (broker/market maker/exchange/clearing house), and I realized that I am putting my money on the line each time I trade, and I don't really have an idea what's going on in the back end.

This brings me to my question(s):

What role does the broker actually hold?
Are they just the bridge between me and the market maker?
Does it matter whether it's a direct-access broker or a broker like TD/Schwab/Robinhood?

When I buy/short a stock, who am I "actually" buying/borrowing it from?
Is the stock coming from my broker or the market maker?
and do they need to really hold the stock in order to lend it to me, or do they just create a record of it from thin air?

Who controls the price of a specific stock?
I understand the laws of supply and demand, but I keep hearing that market makers earn their money from the spread and they control the price and liquidity...

How does it actually work?

When I place an order to buy at the ask price of $10, someone is selling it to me at that price.

Does the sale occur when there's another seller that's willing to sell the stock to me for $10 (whether it's a retail trader or high-frequency bot)?
Or does the sale occur when the marker maker decides they are willing to buy at $10?

I guess, essentially what I'm asking is, are traders really trading between themselves? Or is this a system where people place buy and sell orders, and the market makers fill the orders if they choose to do so when it's profitable for them?


What is the full flow of a stock, from A to Z?

Thanks!
More...
%%
Sure i remember in school Mr Parker did his head fakes\LOL
Strange timing when i put my sell my TQQQ @ $9#, my charts went out on one chart service/but not both.LOL { it IS NOT MY EXACT NUMBER]
NOBODY works for nothing.
As far as one u TUBE trader whining about OPENING TRADE his lousy fill on 1 qqq;
try 2/LOL..............................................
 
terr said:
The answer, I presume, is A? Although I guess that would depend on what a "Pegged Order" means exactly.
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a pegged order operates differently according to different exchanges, but it is well defined on each. On nasdaq, they do it very shadily and do not guarantee that the order of arrival is preserved when the order stack moves to a different price level. on IEX they DO gaurantee this. its very expensive to find out what the implications of this are.
 
stochastix said:
On nasdaq, they do it very shadily and do not guarantee that the order of arrival is preserved when the order stack moves to a different price level. on IEX they DO gaurantee this.
More...
Huh, what? Let's say you have a pegged NBBO bid in the market. If the touch moves towards your peg, you got filled so there is nothing to discuss. However, if the touch moves away, that means that somebody has taken out a full level (or more) on the other side. At the very least, orders that tried to aggress and did not get filled should have priority over your peg.

[edit] come to think, offset peg (which is rare) might compete with regular limits for priority away. It's not exactly clear which should have higher priority, offset peg or regular limit that was resting at that level.
 
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Same Lazy Element said:
Huh, what? Let's say you have a pegged NBBO bid in the market. If the touch moves towards your peg, you got filled so there is nothing to discuss. However, if the touch moves away, that means that somebody has taken out a full level (or more) on the other side. At the very least, orders that tried to aggress and did not get filled should have priority over your peg.

[edit] come to think, offset peg (which is rare) might compete with regular limits for priority away. It's not exactly clear which should have higher priority, offset peg or regular limit that was resting at that level.
More...
when it moves away, the orders are moved, on nasdaq, this happens in such a way that the re-insertion order is random (at best) and stacked against you because of something you dont know on the other. On IEX, they properly implement in their matching engine the logic that the FIFO order is retained when the stack of orders moves to a further away price, it doesnt matter if its offset or not.

If you have say, one regular buy order sitting at 60.55 for 100
then all the primary peg orders will sit behind this original 60.55 order until it is canceled and 60.54 becomes the next best price, all the orders pegged will need to be canceled and 60.55 and moved to 60.54, when this happens, the deck gets shuffled, on iex, it doesnt. this is a fact I confirmed it with both. its very expensive to find this out on your own. your welcome
 
stochastix said:
If you have say, one regular buy order sitting at 60.55 for 100
then all the primary peg orders will sit behind this original 60.55 order until it is canceled and 60.54 becomes the next best price, all the orders pegged will need to be canceled and 60.55 and moved to 60.54, when this happens, the deck gets shuffled, on iex, it doesnt. this is a fact I confirmed it with both. its very expensive to find this out on your own. your welcome
More...
Thank you. I actually looked up the IEX docs a second ago, so when you said "guaranteed" you actually meant "sort-of guaranteed" :)

The way I read it (and it's not the clearest doc), the resting orders at the new level will have higher priority than the pegged orders that were moved to the new level, so it's more like "arrival time ordering is guaranteed among the pegged orders only". Which is not much in terms of a guarantee for the exact peg unless you are dealing with a book that rarely moves or the book that has no size outside of the touch.

But I guess if you are making inside on a book that is wider than a tick, using an offset peg with a queue guarantee is very valuable. You are essentially perma-ticking the best regular order.

stochastix said:
when it moves away, the orders are moved, on nasdaq, this happens in such a way that the re-insertion order is random (at best) and stacked against you because of something you dont know on the other. On IEX, they properly implement in their matching engine the logic that the FIFO order is retained when the stack of orders moves to a further away price, it doesnt matter if its offset or not.
More...
Actually, specifically to the pegged orders, it's unclear which approach is "fair" - the random re-ordering or the original price priority. I would say that IEX has probably made an effort to reduce negative selection for the less speedy players, but I need to think more about the implications of either approach.

The bestiary of native equity order types has grown faster than I could keep up, especially once you start thinking about the impact of rebates and various native display models. I wonder what portion is there only to make MM lives a bit easier.
 
Market orders are filled by market makers (who are in the volume business). Limit orders go straight to the exchange.

Modern market makers in equities are pretty much ULL-HFT and their strategy is that they believe they can find better prices than nbbo if they internalize orders across various brokers. That’s their strategy, and it’s not something you can compete with.

HFT is different, with low latency strategies focused more on front running large orders via rebates and order prioritization. These guys compete for your order and do attempt to game the system. Large scale internalization has pushed these guys to primarily look for large orders, as they cannot compete for internalized traffic (correct me if this has changed).

However, smaller variants of low latency hft are generally found everywhere — think of all those bored comp sci majors who developed algos to trade for them. Most of these strategies are just intra-day momentum. You should see them as a wind that blows across prices — can be headwinds, can be tailwinds.

So from A to Z:
Buy market order —> your broker uses a smart router to fill at the best cost —> cost is compared against wholesalers/internalizers/exchanges —> whatever typically isn’t filled by an internalizer is filled on the exchange

Buy limit order —> order rests on the exchange in line —> if the price is touched it fills at the exchange
 
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