Market Depth Revisited: globex, esignal, and more!

D

demonet

Hello all:

I know there are portions of many threads in ET which discuss Market Depth (or DOM), nonetheless, I thought I would see if I could scare up some additional commentary/insight for some questions which have been coming up for me.

First, I am trying out eSignal's new CME Market Depth (optional with version 7.5), and have been using it exclusively for ES thus far. For those of you who have not seen it, it is very much like the eSignal NASDAQ Level II screen, except of course there are really no market makers in ES and there are only 5 levels of bid and ask. When comparing this CME Market Depth to a standard market depth (like IB's), eSIgnal's version definitely seems have some benefits, mostly in being able to graphically visualize everything happening on a market depth screen. For instance--much like the LII for NASDAQ--in addition to the volume at each level on the bid and ask side on a standard DOM, there is a histogram representation of each of the 5 levels of bid and ask (those with button trader will be familiar with this). This is helpful to quickly see volume at a level or overall. In additioin, each level of the bid and ask has a little up green arrow flash when volume increases and a red downward arrow flash when volum decreases. Again, this is helpful to make quick assessments of volume sizes and changes to those volume sizes.

Another familiar feature reminiscent of the NAS LII screen is the multicolored, horizontal "shifting" histogram above the 2 columns of bid and ask. This feature attempts to show the bid and ask volume/price shift in real time using a band of color to represent a level of the bid (with the same color representing this same bid level's counterpart on the ask side), and width the of the band representing the volume (with the width directly proportional to the volume at that particular level). Because each level of the bid and its counterpart on the ask side is a different color, one can see the constant movement of the bid and ask in relation to each other. The center-most color is two hisograms representing the BBid and BAsk.

Esignal has also included in this CME market depth a level II-like running list on the right side of the market depth, which initially, I assumed was a display of consummated trades like the traditional NASDAQ level II screen. However, upon closer inspection it appears as if it just shows orders--it lists order size and price. Since the price shown in this list ranges anywhere from 5 ticks above or below the "last" price, this list definitely is not consummated sales like NAS level II or TOS. In addition, the "orders" shown are repeated again and again. To be honest, I am still confused as to what this list is displaying, so if anyone can lend some insight, I would appreciate it.

However, what I have enjoyed most so far since starting to watch this CME market depth is the aforementioned horizontal histogram showing each level of bid and ask at a different color (each "level" a different color).

As a relatively new trader, I have read much about the importance and/or versatility of the DOM. However, I have been watching the regular IB DOM (and then on button trader) for months and I have always felt like I was getting very little info from it as the volume changes/price movement can be so rapid that I could never really anticipate which direction the price was going to go. With eSignal's ES DOM and the colored horizontal histogram, I am able to see a great deal more movement and can anticipate the change in the bid and ask prices. .

However, even with this better understanding of DOM, I wanted to gather some input from other ETers who might be able to explain in more detail (or maybe with just more effective expression) what is actually happening on Globex when things change or move on the DOM.

When I started writing this thread, I simply listed questions I had regarding DOM, however, I found the list of questions grew to such a size that I thought best if someone (or several) just take a shot at giving an actual step-by-step explanation of the DOM movement and how it relates to the GLOBEX "reality" of what is happening from order to fill.

Although, I won't list all the questions I had originally, I will throw some out initially if it helps move this thread along...

Question 1. I realize that at the outset, when the BBid and BAsk volumes oscillate back and forth in size, this is because (i) trades are being consummated and/or (ii) bid volume or ask volume, or both, are being increased. After a certain point you will see one side get close to zero (or the center-most color in the market depth histogram (which shows the BBid or BAsk) will vanish into the other) and the next level bid or ask volume shifts to the BBid or BAsk depending on whether the price is moving up or down.

When the best bid volume is higher than the best ask volume, and eventually the BBid volume "eats up" the BAsk volume, the bid and ask will then shift. Each price level on the bid side will shift up one level and each price level on the ask side will shift down one level, i.e. the price will decrease. This makes sense to me from the P,V relationship perspective in that the higher volume on the bid side is causing the price to move.

However, what is still a bit confusing to me is the direction of the price movement--for example, in the above scenario when there is a higher bid volume, over time (a very short period of time when things are moving), the ask volume diminishes to zero(at a given price), and then the bid and ask shift down a tick in price. From a logical perspective, one would thing that a higher bid volume would equate to a higher demand from those willing to buy, and therefore price (or rather BBid and BAsk) would increase. However, I am obviously conceptually misunderstanding what exactly is taking place on Globex. Even if the demand is only from those willing to buy at a certain price, meaning that because of this specificity, the price would not increase beyond this price, why would the price (i.e. the bid and ask) decrease?

Question 2: Let's say the bid volume at 1135.75 is higher than the ask volume at 1136. Would this inexorably cause more trades to be executed at 35.75 as opposed to 36? If so, why? what causes one side or the other to "acquiesce" to the bid or ask price? this is confusing, because Globex is fully automatic. At least with the NY exchanges, the trades--and whether they are executed at bid or ask are subject to the whims of the market makers.

Thanks in advance.
 
Yes. I read it and found it insightful. He explained how he looks at competing volumes from the bid or ask and how the disparity between the two will tend to trigger movement, and how equality will tend to cause a stasis in price (or b/a).

I have tried to cull everything on ET (which was locatable by the search engine) having to do with market depth, and while there are threads which discuss ways to use it, there does not seem to be a lot of information of "process", i.e. what is happening on Globex when market depth does something. Jack Hershey did a good job in one thread, but it was somewhat limited in scope and, further, if you know his posts, they often can be hard to follow. In fact Jack had said in one of his posts covering this that the market depth picture is only partially being shown and some things are happening which are not reflected in the DOM screen.

This is more to what I am getting at. I am trying to understand how and why things happen the way they do on the market depth screen as processed by GLOBEX..
 
Think in terms of limit orders stored in the book and market orders eating the limit orders. Then think of different market participants patience and impatience levels. You'll find your answers.

Ok speaking of answers and market depth, has anyone's Market Depth from IB been halting lately? Mine is halting all the time and its driving me nuts. Any solutions?

Sorry to take your thread a tad off track.
 
You do not understand a couple of basic trading tenants.

You do not know exactly what DOM shows people.

Thee are several things, when they are introduced to you, that will straighten everything out.

You were correct to make a seemingly endless list of Q's.

In fact, the order in which they came up for you is very important. It would enable others to coach you through the value of DOM.
 
Quote from Grob109:

You do not understand a couple of basic trading tenants.

You do not know exactly what DOM shows people.

Thee are several things, when they are introduced to you, that will straighten everything out.

You were correct to make a seemingly endless list of Q's.

In fact, the order in which they came up for you is very important. It would enable others to coach you through the value of DOM.
More...

I am well aware that when watching DOM what I believe to be happening much of the time is not what actually is happening.

I do very much want to make progress in this area, because, as Jack says, the mechanics behind the DOM are comprised of basic trading tenets. Perhaps my fear of not asking the questions outright in my first post was not only due to the large number of questions I had, but also that what I reveal about my knowledge overall in asking those questions might be flawed.

I am aware that my problem with regard to the DOM (and some other aspects of trading), is a problem everyone shares in life when we attempt to learn, i.e we do not know what we do not know.

To overcome this learning obstacle, perhaps it would be more efficient to state what I understand to be happening while watching the DOM and , if I am wrong, please correct/coach me. If I instead just started asking questions about the DOM, many would probably be based on assumptions which are flawed.

Here is my understanding at the most fundamental/theoretical level (I will insert a "?" at points where I lack certitude in my understanding):

The Bid and the Ask prices are, respectively, the price at which someone will buy and someone will sell. The BBid and BAsk are the b/a that are closest to each other. The volume of the BBid represents the number of offers to buy at the BBid price, and the volume on the BAsk, is the number of offers to sell at the BAsk price.

At a given moment (?), a portion (or all) of the BAsk volume (i.e. offers to sell at BAsk price) will "agree" (for lack of a better word) to instead sell at the BBid price. Conversely (and to me randomly), at another given moment(?), a portion (or all) of the BBid volume (i.e. offers to buy at the BBid price) will "agree" to buy at the BAsk price.

The respective demand, i.e. the magnitude of the BBid or BAsk volume, would seem to me to dictate which of the two events above will happen-- that is, if the BBid volume is greater, more ensuing trades (but not all?) will be connsumated at the BBid price, if the BAsk volume is higher, then more ensuing trades (but not all?) will be consummated at the BAsk price..

Continuing... as an example, if the BBid volume is higher than the BAsk volume, and ensuing trades consummate at the BBid price until such a time that BAsk volume diminishes to zero, all or a portion of the volume at the next ask (1 tick higher price) can "agree" to trade a the BBid price. (correct?)

The first question that comes up for me:

....I have watched DOM when there have been trades at BBid price and the BAsk volume will diminish, however, there are many times that the BBid volume will not. This does not seem possible. I would think that for every 1 contract trade that takes place--at least at a theoretical level--both the BBid and the BAsk volume would have to decrease by 1 because there is a match, i.e. a trade.

The next logically connected question:

If in the above scenario that the BBid vooume is higher, and if both the BBid and BAsk volume diminish for each trade until there still is BBid volume but no BAsk volume, at what point does the BBid price decrease? In other words, what dynamic causes the shift in price to the next bid (1 tick lower price) at this point as opposed to continue to trade at BBid price?

[My apologies for the overuse of the passive voice in this post].

If the above description is partially or wholly incorrect, then please comment...that's why I posted!

Much appreciation in advance.
 
Gee relax, he's only asking a question that, quite frankly, i'm sure a lot of people want to ask.

Quote from Grob109:

You do not understand a couple of basic trading tenants.

You do not know exactly what DOM shows people.

Thee are several things, when they are introduced to you, that will straighten everything out.

You were correct to make a seemingly endless list of Q's.

In fact, the order in which they came up for you is very important. It would enable others to coach you through the value of DOM.
More...
 
I dont think you can take the numbers at face value because I dont believe they are completely accurate. At every moment there are orders being added and subtracted from all over the world. There has to be a lag in the data and even if it is only a fraction of a second you can see how fast these numbers are changing. I doubt seriously that the numbers you see are the actual facts at any given moment, at least on the current bid/ask.
 
Quote from cwjcntr:

Gee relax, he's only asking a question that, quite frankly, i'm sure a lot of people want to ask.
More...

Ok, I admit, I overreacted.. Sorry :)

But it is definitely interesting how the order matching works for markets, and all the factors that go into what comprises the "DOM" view that we see.
 
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