Market Maker Tricks
- Thread starter froggie
- Start date
I appreciate alll the useful comments here. But I have a question for those who post a page of words just trying to be funny. Why are you wasting your time? If you dont have a logical answer to the question at hand, just dont reply. Nobody is forcing you to reply. This goes for all the wise guys in here trying to be funny. GROW UP!
This is a thread meant to see how much individual traders know about the inside market workings. Lets learn from each other.
This is a thread meant to see how much individual traders know about the inside market workings. Lets learn from each other.
The following is an excerpt from printed manual enclosed with video course How to Scalp Any Market devoted to scalping the NASDAQ equities. I'll break it down in parts for readability. Hope it helps.
6.3 Market Participant Behavioral Patterns
Given all that is said above about Level 2, itâs time to discuss Level 2 reading in the perspective of using it as directional tool. Again, as with size, this factor is not something that could be used easily nor as a stand alone primary method of reading. The role of this approach is not as great as it used to be before SuperSOES and decimalization. Still, there are times when recognizable patterns of market participants appear and can be utilized. Itâs particularly true for thinner issues, as stocks with high liquidity rarely if ever allow for any reliable Level 2 reading.
Before we continue, a reader should be warned: itâs not easy to tell when these methods are applicable and when there is no real pattern. It wasnât easy even before 2001 and was never an exact science. Many books tried to describe how to read market maker intentions by their level 2 movements. Yet, it will always remain an art to a certain degree, and only experience and daily observations will allow a trader to fully master it. It became even harder with all the technological innovations of recent years. We discuss these patterns here to give a reader a more complete understanding of Level 2, and to give some guidelines to those devoted individuals who want to increase their use of this tool. In my personal trading this approach is used sometimes as a supplementary method when the obvious pattern appears.
1. Using hidden size to fill a big order
As we discussed earlier, reserve order can be used to hide the real size of an order. The idea here is to avoid spooking other traders by displaying a huge order. You can see reserve order easily when there is a displayed size for hundreds of shares that will not disappear despite thousands of shares trading at this price. This could be done using both, real market participant identification (MPID), like GSCO or MLCO, and ECN, like ARCA or ISLD. When you see this happening, you have no sure way of knowing the size of the real order (see Fig 13).
On Fig 13 you can see a seller at $5.44 showing just 100 shares. He has a reserve order hidden behind those 100 shares at the offer price. Prints scroll on Times & Sales, yet the price stays the same.
Sometimes an indication of a reserve nearing exhaustion is a big print on the opposite side of the spread. If you see many shares filled at $20 in a string of buys while a single seller is holding the stock by his offer, and then the print for big block appears at, say, $19.90, this often leads to a âlidâ being lifted â the seller leaves a $20 offer allowing a stock to move higher. This big block is not a necessary requirement for a seller to go away â itâs just one of the patterns that could be used for a quick scalp.
2. Using big order size for intimidation
We call these types of orders NITBB or NITSO (No Intention to Buy Bid or No Intention to Sell Offer). When using this technique, the market participant displays a huge size greatly exceeding all others seen on Level 2. Most often itâs done in order to provoke traders to move in the opposite direction, as they are trying to undercut this big size or to get in or out âfront runningâ this size.
Letâs describe this scenario the following way:
If some player wants to accumulate shares at $19.90 while the market is at $19.98 x 20, he can try and display a huge size at $20.02, spooking traders into selling. Meanwhile our player places a bid for small shares at $19.90 with a reserve order for the amount of shares he needs, thus absorbing the selling. When he is done buying, he cancels his sell order. Of course this technique could now be used to propel the stock up. If a quick profit was the original intention of our player, he can do just that by selling his accumulated shares at a higher price. More often, this technique is used simply to accumulate shares when building big position. Needless to say, this can be done only on thinly traded issues â an attempt to do something like this on MSFT will be doomed. This also carries a certain risk â there could be someone attracted by big size to initiate or liquidate his position, and if that happens, our player will be stuck with big position against his original intention.
A trader can try and use this situation for a scalp in the opposite direction, buying when the accumulation is done and big intimidating size disappears.
A variation of this technique would be to drive a stock to a certain price level by following it with a bid or an offer which stays slightly away from the inside market and chases it as a price moves. If a stock trades at $19.98 x 20 and our player wants it at, say $20.20 to start unloading his position or for whatever reason, he displays big size at $19.93 for instance, and trails it higher as a stock moves higher but stays behind the best bid all the time.
In both cases such a âfakeâ order is usually easy to spot given two signs. Firstly, such an order most often stays slightly away from the inside market. Secondly, if some trades are executed against this order, it usually disappears immediately.
6.3 Market Participant Behavioral Patterns
Given all that is said above about Level 2, itâs time to discuss Level 2 reading in the perspective of using it as directional tool. Again, as with size, this factor is not something that could be used easily nor as a stand alone primary method of reading. The role of this approach is not as great as it used to be before SuperSOES and decimalization. Still, there are times when recognizable patterns of market participants appear and can be utilized. Itâs particularly true for thinner issues, as stocks with high liquidity rarely if ever allow for any reliable Level 2 reading.
Before we continue, a reader should be warned: itâs not easy to tell when these methods are applicable and when there is no real pattern. It wasnât easy even before 2001 and was never an exact science. Many books tried to describe how to read market maker intentions by their level 2 movements. Yet, it will always remain an art to a certain degree, and only experience and daily observations will allow a trader to fully master it. It became even harder with all the technological innovations of recent years. We discuss these patterns here to give a reader a more complete understanding of Level 2, and to give some guidelines to those devoted individuals who want to increase their use of this tool. In my personal trading this approach is used sometimes as a supplementary method when the obvious pattern appears.
1. Using hidden size to fill a big order
As we discussed earlier, reserve order can be used to hide the real size of an order. The idea here is to avoid spooking other traders by displaying a huge order. You can see reserve order easily when there is a displayed size for hundreds of shares that will not disappear despite thousands of shares trading at this price. This could be done using both, real market participant identification (MPID), like GSCO or MLCO, and ECN, like ARCA or ISLD. When you see this happening, you have no sure way of knowing the size of the real order (see Fig 13).
On Fig 13 you can see a seller at $5.44 showing just 100 shares. He has a reserve order hidden behind those 100 shares at the offer price. Prints scroll on Times & Sales, yet the price stays the same.
Sometimes an indication of a reserve nearing exhaustion is a big print on the opposite side of the spread. If you see many shares filled at $20 in a string of buys while a single seller is holding the stock by his offer, and then the print for big block appears at, say, $19.90, this often leads to a âlidâ being lifted â the seller leaves a $20 offer allowing a stock to move higher. This big block is not a necessary requirement for a seller to go away â itâs just one of the patterns that could be used for a quick scalp.
2. Using big order size for intimidation
We call these types of orders NITBB or NITSO (No Intention to Buy Bid or No Intention to Sell Offer). When using this technique, the market participant displays a huge size greatly exceeding all others seen on Level 2. Most often itâs done in order to provoke traders to move in the opposite direction, as they are trying to undercut this big size or to get in or out âfront runningâ this size.
Letâs describe this scenario the following way:
If some player wants to accumulate shares at $19.90 while the market is at $19.98 x 20, he can try and display a huge size at $20.02, spooking traders into selling. Meanwhile our player places a bid for small shares at $19.90 with a reserve order for the amount of shares he needs, thus absorbing the selling. When he is done buying, he cancels his sell order. Of course this technique could now be used to propel the stock up. If a quick profit was the original intention of our player, he can do just that by selling his accumulated shares at a higher price. More often, this technique is used simply to accumulate shares when building big position. Needless to say, this can be done only on thinly traded issues â an attempt to do something like this on MSFT will be doomed. This also carries a certain risk â there could be someone attracted by big size to initiate or liquidate his position, and if that happens, our player will be stuck with big position against his original intention.
A trader can try and use this situation for a scalp in the opposite direction, buying when the accumulation is done and big intimidating size disappears.
A variation of this technique would be to drive a stock to a certain price level by following it with a bid or an offer which stays slightly away from the inside market and chases it as a price moves. If a stock trades at $19.98 x 20 and our player wants it at, say $20.20 to start unloading his position or for whatever reason, he displays big size at $19.93 for instance, and trails it higher as a stock moves higher but stays behind the best bid all the time.
In both cases such a âfakeâ order is usually easy to spot given two signs. Firstly, such an order most often stays slightly away from the inside market. Secondly, if some trades are executed against this order, it usually disappears immediately.
--- continued---
3. Using big order size for attraction
This is a directly opposite scenario. When a player has a big position to sell and he senses some buyers are looking for a size to buy, he can try and display big size in order to attract a buyer by opportunity to build his position in a single hit. This involves differentiation between this situation and the one we described earlier, when appearance of a big size will spook traders. An experienced trader working big orders usually possesses such skill (although he wonât be guarantied from mistakes of course).
A trader can use this situation as an indication of some institutional interest in a stock. Considering that big institutional firms use a much longer time frame, there is no guarantee that a stock is going to move right away, but itâs worth keeping an eye on for signs of movement starting.
4. Accumulation on the go
There are cases when a big player interested in a stock, builds his position as a stock moves. There is already interest in a stock aside from his interest, maybe as a result of some news event. Trying to get as much shares as possible at more favorable prices, our player can apply combinations of methods described above. The player will show big sizes trying to cap the movement and provoke pullback which he will be using to accumulate more shares. The player will have to be very careful to avoid being âsteamrolledâ by hot buying. As he maneuvers, his movements sometimes can be read. This is dangerous and fast game, for our player as well as for a trader that tries to utilize his moves. If he is using ECNs to mask his identity, this becomes even more of an art. Used in conjunction with chart reading, these observations can provide additional clues for timely entry and exit.
Letâs sum it up for simplicity.
1. To move big size a player can use hidden orders to avoid disclosing his real intention by displaying real order.
2. To stimulate other participants to fill his order a player can display fake orders of significant size on the opposite side.
3. To attract big interest looking for liquidity a player can display real size demonstrating that liquidity is there.
4. To move big size on active stock within certain price interval a player can use fake order of significant size trying to cup the movement until he is done accumulating or dumping his position.
5. A player can use his real identity or hide behind ECN depending on his intention. He can make an inside market being on both sides and under different identities.
As you can see, differentiating between these situations and reading playerâs intentions can be quite tricky. This method requires observations in order to learn the patterns used by certain players in certain stock. While these guidelines provide certain insight into the way big players operate, reading of their intentions will never be exact science. Itâs a game of head fakes where anything is possible. Hiding intentions, faking intentions, pretending to be a seller, while in fact having buying in mind is the name of this game. Some are skilled at this and play it to perfection. Some are not as much, and play it in a way that allows reading them easily. Some do not play it at all, just doing what they have in mind. Skills to read this can be used to supplement your primary method of reading. Rarely can it be used as a stand alone method.
3. Using big order size for attraction
This is a directly opposite scenario. When a player has a big position to sell and he senses some buyers are looking for a size to buy, he can try and display big size in order to attract a buyer by opportunity to build his position in a single hit. This involves differentiation between this situation and the one we described earlier, when appearance of a big size will spook traders. An experienced trader working big orders usually possesses such skill (although he wonât be guarantied from mistakes of course).
A trader can use this situation as an indication of some institutional interest in a stock. Considering that big institutional firms use a much longer time frame, there is no guarantee that a stock is going to move right away, but itâs worth keeping an eye on for signs of movement starting.
4. Accumulation on the go
There are cases when a big player interested in a stock, builds his position as a stock moves. There is already interest in a stock aside from his interest, maybe as a result of some news event. Trying to get as much shares as possible at more favorable prices, our player can apply combinations of methods described above. The player will show big sizes trying to cap the movement and provoke pullback which he will be using to accumulate more shares. The player will have to be very careful to avoid being âsteamrolledâ by hot buying. As he maneuvers, his movements sometimes can be read. This is dangerous and fast game, for our player as well as for a trader that tries to utilize his moves. If he is using ECNs to mask his identity, this becomes even more of an art. Used in conjunction with chart reading, these observations can provide additional clues for timely entry and exit.
Letâs sum it up for simplicity.
1. To move big size a player can use hidden orders to avoid disclosing his real intention by displaying real order.
2. To stimulate other participants to fill his order a player can display fake orders of significant size on the opposite side.
3. To attract big interest looking for liquidity a player can display real size demonstrating that liquidity is there.
4. To move big size on active stock within certain price interval a player can use fake order of significant size trying to cup the movement until he is done accumulating or dumping his position.
5. A player can use his real identity or hide behind ECN depending on his intention. He can make an inside market being on both sides and under different identities.
As you can see, differentiating between these situations and reading playerâs intentions can be quite tricky. This method requires observations in order to learn the patterns used by certain players in certain stock. While these guidelines provide certain insight into the way big players operate, reading of their intentions will never be exact science. Itâs a game of head fakes where anything is possible. Hiding intentions, faking intentions, pretending to be a seller, while in fact having buying in mind is the name of this game. Some are skilled at this and play it to perfection. Some are not as much, and play it in a way that allows reading them easily. Some do not play it at all, just doing what they have in mind. Skills to read this can be used to supplement your primary method of reading. Rarely can it be used as a stand alone method.
Honestly though, if you had an edge based off of market maker games/tricks and you knew that once the general public figured out how to take advantage of these tricks and that, when they did, everyone would play them and your edge would dissapear, why in the world would you tell anyone? Its one thing to learn from each other, its another thing to ask for someone to tell you a secret that they've discovered. Think about it.
Steve,
IMO: there are no secrets. There are no edges based on something conspired and hidden from others (well, fraudulent activities are but that's not the matter of discussion). Those tricks described above is simply one more piece to the puzzle. I don't believe one can trade solely on those. They do, however, add a little to your reading sometimes if you are scalping NAZDAQ.
From my personal experience I'd put it this way: back in the pre-decimalization days, glory of 1998-2001, reading the Level II games constituted probably about 30-40% of what I was looking at. These days, it's more like 5%. Level II for me is rather risk evaluation tool - I use it to size up liguidity to evaluate possible slippage on entry/exit. This gives me an idea of position size I want to play in order to keep my losses within my risk tolerance.
I am far from claiming that this is only approach; I know people that still trade (successfully) almost solely off Level II/T&S. But this is microscalping, I don't do it and don't teach it. To me scalping is not bid/ask profiting but rather taking profit at 1:1 risk/reward level.
IMO: there are no secrets. There are no edges based on something conspired and hidden from others (well, fraudulent activities are but that's not the matter of discussion). Those tricks described above is simply one more piece to the puzzle. I don't believe one can trade solely on those. They do, however, add a little to your reading sometimes if you are scalping NAZDAQ.
From my personal experience I'd put it this way: back in the pre-decimalization days, glory of 1998-2001, reading the Level II games constituted probably about 30-40% of what I was looking at. These days, it's more like 5%. Level II for me is rather risk evaluation tool - I use it to size up liguidity to evaluate possible slippage on entry/exit. This gives me an idea of position size I want to play in order to keep my losses within my risk tolerance.
I am far from claiming that this is only approach; I know people that still trade (successfully) almost solely off Level II/T&S. But this is microscalping, I don't do it and don't teach it. To me scalping is not bid/ask profiting but rather taking profit at 1:1 risk/reward level.
threei,
Your scanner resembles trade-ideas product. Are you connected?
Michael B.
Your scanner resembles trade-ideas product. Are you connected?
Michael B.
Those tricks are handy and a lot of GREAT nazdaq traders still use them, but many of those "tricks" now have programs that compete with the humans. In fact , one of my ex traders used to spend his time finding programs and trading against programs that were built to play against thin issued nasdaq stocks....until the writers of the programs (some firms were gettin smoked )then changed their algorithm and more Programs were written to battle 1) the level 2 2) other programs 3) the market in general
plus with new algorithmic VWAP softwares and softwares like liquidnet, this has become even harder to handle
http://www.wallstreetandtech.com/rc/et/showArticle.jhtml?articleID=163701192
if u wanna make real money, you must learn to just trade or write boxes, cause pickin off market makers in thin stocks is like pickin up nickles in front of a bulldozer...when u get caught, you get caught
OH and most buy side firms now have their own level 2 and traders..which throws another loop
That being said there are still a select few that are very successful at doin this, they are veterans and they see their universe of stocks shrinking everyday.If they can pull it off..more power to them.
in my opinion if your a beginner dont waste ur time tryin to learn this, unless you want to build a box and have it trade itself over a universe of say 100 thin issues...otherwise learn to trade a different method.
just my 2c
david
plus with new algorithmic VWAP softwares and softwares like liquidnet, this has become even harder to handle
http://www.wallstreetandtech.com/rc/et/showArticle.jhtml?articleID=163701192
if u wanna make real money, you must learn to just trade or write boxes, cause pickin off market makers in thin stocks is like pickin up nickles in front of a bulldozer...when u get caught, you get caught
OH and most buy side firms now have their own level 2 and traders..which throws another loop
That being said there are still a select few that are very successful at doin this, they are veterans and they see their universe of stocks shrinking everyday.If they can pull it off..more power to them.
in my opinion if your a beginner dont waste ur time tryin to learn this, unless you want to build a box and have it trade itself over a universe of say 100 thin issues...otherwise learn to trade a different method.
just my 2c
david
Michael,
this is Trade-Ideas engine, right. We added several setups of ours in co-operation with TI and prolonged trial to two weeks. The story is, we used to have our own for 4 years; then I saw TI's scanner and loved it so much that went to them with suggestion: we abandon ours and switch to theirs adding our setups and providing them with educational aspect. It worked out perfectly: each of us does what they do best. Guys at TI are incredibly great to work with I have to add; I never regretted that decision even though we gave up one of our products. Theirs was superior beyond any doubt, and it worked to benefit of our membership.
this is Trade-Ideas engine, right. We added several setups of ours in co-operation with TI and prolonged trial to two weeks. The story is, we used to have our own for 4 years; then I saw TI's scanner and loved it so much that went to them with suggestion: we abandon ours and switch to theirs adding our setups and providing them with educational aspect. It worked out perfectly: each of us does what they do best. Guys at TI are incredibly great to work with I have to add; I never regretted that decision even though we gave up one of our products. Theirs was superior beyond any doubt, and it worked to benefit of our membership.