Market Depth Revisited: globex, esignal, and more!

Quote from demonet:

The first question that comes up for me:

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.

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No. In order for a trade to take place, you need someone either offering to buy (BID) or someone offering to sell (ASK) and an 'outside party' to come along and sell to the person on the BID, at the price the are willing to buy for, or to buy from the person on the ASK at the price they are willing to sell for. The people on the BID and ASK never actually get to 'meet' each other, therefor there is no 'match' during a trade. Try and visualize the mechanics of a trade at the same time as you are watching the DOM, this will help you. Think in terms of different kinds of orders (limit, market, stop) and try and imagine what is happening as trades are made and orders come in etc...

There is also lots more going on in the DOM that is misleading (or revealing) that you should also consider. People will continuously be entering the BID or ASK and canceling, or decreasing size, or increasing size etc... There are attempts to manipulate price by joining the BID or ASK with fake orders, then canceling them before they are traded.
 
Quote from macal425:

No. In order for a trade to take place, you need someone either offering to buy (BID) or someone offering to sell (ASK) and an 'outside party' to come along and sell to the person on the BID, at the price the are willing to buy for, or to buy from the person on the ASK at the price they are willing to sell for. The people on the BID and ASK never actually get to 'meet' each other, therefor there is no 'match' during a trade. Try and visualize the mechanics of a trade at the same time as you are watching the DOM, this will help you. Think in terms of different kinds of orders (limit, market, stop) and try and imagine what is happening as trades are made and orders come in etc...

There is also lots more going on in the DOM that is misleading (or revealing) that you should also consider. People will continuously be entering the BID or ASK and canceling, or decreasing size, or increasing size etc... There are attempts to manipulate price by joining the BID or ASK with fake orders, then canceling them before they are traded.
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Yes, that's how I try to visualize it also. People on the bid and ask are actually limit orders (we'll call them patient, as opmtrader suggested to think about patience/impatience levels); they are hoping for the market to come to them for their fill. Then there are those that are impatient and who enter at market, ie. buy at ask and sell at bid. These orders are what move markets because they are the ones that are taking down bid/ask sizes. If you have a large BBid and a smaller BAsk but you see lots of orders going off at the BBid (by watching the tape) that means that the market wants to move down, regardless of what the patient people want/expect. Now, we also need to remember that if the patient orders suddenly become impatient and decide to give up the spread (what you meant when you said that all at once they will suddenly decide to get rid of their limits and start going at the other side) the market will usually quickly shift; although this isn't as common as one would think, usually it's market orders shifting the market as I understand it.

As far as sizes on the bid/ask, I agree they can be very misleading; large institutions know the power of large imbalances on the bbid/bask, it can result in dumb money moving in what is actually the wrong direction in the market. One very curious thing that I have found when watching DOM on lots of different markets including ES, DAX, and HSI is that actually (and maybe even the majority of the time) price will drift towards the direction where there is more size, fe. combined bid is 5000 combined ask is 3000, price may actually start going down. Basically, how I understand it is the sizes on the DOM are actually trying to trick you more than anything and you need to take a contrarian position which can/will be comfirmed by how orders are filled by watching the tape. The bid/ask sizes are simply barriers of price movement and it's very difficult to discern when they are real or when they are fake and will be pulled as the market gets closer. That's all for now, feel free to correct me/say I'm wrong.
 
I thank everyone for their posts. I have gained some new insights regarding DOM.

One additional question however...

from the information I have come across, most people tend to follow a maxim that "high bid volume=bullish energy and higher ask volume=bearish energy".

This would tend to make sense as the buying volume would create more willing buyers to buy at ask and higher as the BAsk volume dissappeared thus pushing the price up.

However, a post by one of ET's most revered and reveiled stated the following:

Posted by Scientist on 09-28-03 08:50 AM:

[...]

One very powerful way of reading near-neutral volume is to read the depth levels. If the ask cumulative (sellers) is extremely heavy, then chances are very high the market will in fact go up. Many people don't understand this, but this is actually the market reality. Lots of ask pressure = bullish energy. Lots of bid pressure = bearish energy. This is a major trading wisdom to understand. This is because markets and exhchanges chase the path of the highest volume - Not that of the best price. Price only matters to small traders - But essentially price discovery is about find the path of the highest volume - always. So if there's lots of selling volume, the market will go up. Have a look at the bid/ask tomorrow. This happens all day long. There are still dreamers out there who think when the cum bid is heavy price must go up! LOL!
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Can anyone comment on this? I have seen countervolume moves where the cum. bid is higher than the cum. ask and the price will go down, but this does not seem to be the norm. Ever since I read this, it has created confusion around my perception of what DOM is telling me.

Thanks in advance.
 
Quote from demonet:

I thank everyone for their posts. I have gained some new insights regarding DOM.

One additional question however...

from the information I have come across, most people tend to follow a maxim that "high bid volume=bullish energy and higher ask volume=bearish energy".

This would tend to make sense as the buying volume would create more willing buyers to buy at ask and higher as the BAsk volume dissappeared thus pushing the price up.

However, a post by one of ET's most revered and reveiled stated the following:



Can anyone comment on this? I have seen countervolume moves where the cum. bid is higher than the cum. ask and the price will go down, but this does not seem to be the norm. Ever since I read this, it has created confusion around my perception of what DOM is telling me.

Thanks in advance.
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Read my post, the last one since this one. I observe this actually the majority of the time, recently I have been using it in my trading even to help me with exiting.
 
Quote from ig0r:

...Then there are those that are impatient and who enter at market, ie. buy at ask and sell at bid. These orders are what move markets because they are the ones that are taking down bid/ask sizes. If you have a large BBid and a smaller BAsk but you see lots of orders going off at the BBid (by watching the tape) that means that the market wants to move down, regardless of what the patient people want/expect. Now, we also need to remember that if the patient orders suddenly become impatient and decide to give up the spread (what you meant when you said that all at once they will suddenly decide to get rid of their limits and start going at the other side) the market will usually quickly shift; although this isn't as common as one would think, usually it's market orders shifting the market as I understand it.

[...]One very curious thing that I have found when watching DOM on lots of different markets including ES, DAX, and HSI is that actually (and maybe even the majority of the time) price will drift towards the direction where there is more size, fe. combined bid is 5000 combined ask is 3000, price may actually start going down. Basically, how I understand it is the sizes on the DOM are actually trying to trick you more than anything and you need to take a contrarian position which can/will be comfirmed by how orders are filled by watching the tape. The bid/ask sizes are simply barriers of price movement and it's very difficult to discern when they are real or when they are fake and will be pulled as the market gets closer.
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Whether the market is driven by the "impatient" market orders which are not reflected in the bid/ask or the institutional red herring bid/offers, it would appear that, notwithstanding classic lessons on DOM (see http://www.cbot.com/cbot/pub/cont_detail/0,3206,909+15731,00.html ), it seems it would be more prudent to look to the lighter volume side of the market for direction.

So Ig0r, would you consider your experience/explanation then most appropriate in application for ETF/indexes/futures? As the CBOT article above seems to put forth the high bid vol=bullish energy, etc. premise, I am left thinking that perhaps this discernment of DOM is more appropriate for other issues (like maybe garden variety equities)? Or is this just an example of textbook smarts (CBOT article) v. "street" smarts?
 
Quote from SethArb:

Re: after hours I see this sometimes
heavy bids get taken out and
huge offers lifted .... or they lift to place their limit sell orders

even higher [/B]
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SethArb- not sure what market you are referring to but . . . "they" consistently "hit" huge B's and "lift" huge O's ALL DAY . . . during reg market hrs in the spoos/naz/etc

its all part of the 'game'

the best rec i can suggest to you, demonet, is observe and actually trade whatever market you want to get a pulse in . . . you will understand what scientist is talking about
 
In trading, high volume areas represent the markets search for value and price discovery and, therefore, have a tendency to attract price.



Take out the highs, take out the lows.

Squeeze the weak shorts, shake out the weak longs.


Regards,
Dave Scott
 
I think there is a lot of content in these posts. What is especially important is the scope on the table.

I plan on commenting on this in small thorough pieces. My orientation is to ES and how by comparing daily profits to a mulltiple of the H/L you get the potential of what the market is offering to each trader. In chit chat, Bob and Cathy, introduced a thread to present daily results on the ES. There is another thread on ranking days of the year in terms of their potential for making money.

Secondly, The DOM can be used as the finest tuned vernier for entering, and exiting or reversing. It is also the key place to use for scaling as well. It defines the market character (long, short or other) at all times.

ET has a pervasive undertow of trading doubts. A subjunctive articulation of where people get screwed over and over and over.

There are levels of this malady typified by various limitations of approaches. Cures do not really depend upon much more than gaining a deep confidence through iterative refinement processes. The trouble is getting to KISS with an approach.

Some of the more dramatic escape clauses that people use here for not being on the ball, will show you fairly accurately where they could be focussing.

DOM is the broadest and deepest single place to take care of business for weeding out misbeliefs and myths and, even more fortunately,for iteratively building upon various stages of success.

Every once in a while a thread comes along where a lot of remediation can be done. This is one of those. It is definitely tough to handle pervasive difficulties. It is a matter of continually lowering the threshold (making it a smaller thing) of the risk of learning. Learning what has to be learned to deal. Really deal.

The human enterprise of making money is the connection of two efficiencies: The market's efficiency to deliver profits and the trader's efficiency to trade for what is offered. DOM is where the game is played by everyone some seen and others unseen.
 
My personal opinion is that the depth of market (DOM) is more of a trap than a help for most traders. As described numerous times in this thread, so many traders misread the DOM and end up hurting themselves more. In many of the more liquid contracts (ES, NQ, ZN, ZB, and many of th eurex contracts) the each price is well represented with enough volume to accommodate most traders order size. What really matters is how much is trading on the bid or the ask. The really good traders have an amazing ability to read through all the percieved activity on the DOM and know which side of the market more of the trade is actually occurring on.
I have found a new application that enables me to extract this information out and display the size that trades on the bid and the ask and displays it in a new form of chart that is easy to read. If you are interesed in this new tool, email or PM me.

Some of the other reasons the DOM is difficult to read, especially the BBid and BAsk are cancelled orders, bluffing and automated quoting algorithms that are constantly loading up the DOM and cancelling liquidy. Another form of these automated quoting algorithms that is often used is All-or-none orders. These are orders that join the bid or the offer for 100 contracts and won't get executed unless the full quantity can be executed. IF all the order can be executed in one transaction, the order gets cancelled.
 
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