Market Maker Tricks

Quote from Drock409:

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
.........................

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
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Good advice David. I fully agree with notion "do not try to make it your sole method of reading". Not only it's hard to tell the case where there is a readable behavioral pattern from just a fluke, similar on the surface but with no substance under it; it also ceased to be effective for meanigful movements. In fraction times correct Level II read could bring the reward of 3/8 - 5/8 in a matter of minute. Now it's what, 5 cents? If you trade thick issue, there is no way to read Level II at all; if you trade thin one, well... you better know what you are doing.

As complementary piece it still can be used now and then; sometimes there are cases where someone acts in a very conspicuous manner, dead giveaway. But I never hunt for those cases specifically, I just utilize them when they pop up on a stock that I trade anyway. That's probably the major difference between trading off level II and utilizing level II as one of tools.
 
You are welcome - just tried to make up for Brandon, aka Royal Pain in The-you-guessed-it-right :D

Just kidding, Brandon is stand-up guy and great trader. Know him from 1998... I have utmost respect for all the survivors of brutal bear.
 
Quote from Threei:

You are welcome - just tried to make up for Brandon, aka Royal Pain in The-you-guessed-it-right :D

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Toni concurs with the royal pain part, fwiw. :D

Brandon
 
So, you are blaming market makers and calling them evil for executing optimal trading strategies? How silly. Also, if anyone sells 5 million shares in one trade at the market they are a complete fool and deserve to lose their money. It is always better to sell small amounts at a time and then wait for the depth to come back and sell some more...

Quote from traderich:

If you are a real savvy daytrader, you can use arbitrage to make use of the different prices offered by market makers.

I have never done it, and I have heard its much more difficult to do it now that inefficiencies such as that are quickly corrected, so you are talking about a few seconds to act on it.

Anyways, I think you are not that far off with your concern. I have heard others talk about market makers fucking around with the stock price and I think there is some truth to it.

Think about this scenario (which is not that far off from reality!)

A big holder of a stock decides to dump all of his holdings (say 5M shares, of the total 65M common out there)

He wants to slowly release his shares to prevent the slobs like you and I from catching on and dumping our small positions (1K or so) as he unloades his.

He is going to have the market maker continue to sell shares at the market in the hopes of getting as much as possible for his shares.

If he just was like any of us slobs and put in a market order to sell 5M shares on a stock with only 65M total and average daily volume of say 300-400k, the stock would drop in HALF in a matter of minutes as the market maker certainly does not want to get stuck with that many shares.

FYI: I know someone who worked for a market maker as a runner and he told me the market makers make zillions!

And, trust me they are not making zillions on the small spread on each trade either! They control the market and the price!

Just realize what is going on and adjust to it. Realize the market is not rationale and there are people screwing around all the time with the price.

cheers.
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Quote from traderich:

If you are a real savvy daytrader, you can use arbitrage to make use of the different prices offered by market makers.

I have never done it, and I have heard its much more difficult to do it now that inefficiencies such as that are quickly corrected, so you are talking about a few seconds to act on it.

Anyways, I think you are not that far off with your concern. I have heard others talk about market makers fucking around with the stock price and I think there is some truth to it.

Think about this scenario (which is not that far off from reality!)

A big holder of a stock decides to dump all of his holdings (say 5M shares, of the total 65M common out there)

He wants to slowly release his shares to prevent the slobs like you and I from catching on and dumping our small positions (1K or so) as he unloades his.

He is going to have the market maker continue to sell shares at the market in the hopes of getting as much as possible for his shares.

If he just was like any of us slobs and put in a market order to sell 5M shares on a stock with only 65M total and average daily volume of say 300-400k, the stock would drop in HALF in a matter of minutes as the market maker certainly does not want to get stuck with that many shares.

FYI: I know someone who worked for a market maker as a runner and he told me the market makers make zillions!

And, trust me they are not making zillions on the small spread on each trade either! They control the market and the price!

Just realize what is going on and adjust to it. Realize the market is not rationale and there are people screwing around all the time with the price.

cheers.
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Let me just say this, someone with 5 million shares out of a 65million share float is not going to excute the trade himself, just as I think rich is saying. He is going to have professional represenation on the floor with a firm like Goldman, Cantor etc etc. He will call their desk and tell them what he wants to do. They will start looking in their book and finding all the people they know of who have been buying that stock. They will call them and say something like "hey there mr buyer, I see you have been buying a lot of XYZ, I happen to have a large lot of it available and I see you are still buying. Do you want to do a lot with me?" Most likely Mr Buyer says yes and so they move on in the book to find another buyer. This is called the third market. Once the transaction is done they will report it to the exchange. Now, if after all this they still have some shares left to sell, say 500K, maybe a million even..whatever, they go down to the people they have on the floor..maybe a firm like Prime Executions. Those guys go to the specialist and tell him what they have, he shows them what he has and the sale is done. I trade large positions in thin names all the time and this is how you do it. You dont go in on ISLD or ARCA or DOT. Well, you could..but if you do you are basically walking around with a please rape me sign hanging off your ass.

Brandon

PS, froggie does this make amends for my first post? :D
 
Quote from stephencrowley:

So, you are blaming market makers and calling them evil for executing optimal trading strategies? How silly.
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Very true. Entire notion of evil market makers is nothing more than a sign of misunderstanding of the very nature of the market. MMs are part of trading landscape, part of that collective consensus formed every minute and reflected in every tick. This consensus is the market. A trader's job is to be in tune with it. This is achieved through many means, and one of the most important is self-responsibility. Putting a blame on unmanageable extrenal force that cannot be read, that does whatever it pleases, that is out to get one leads to an idea of trading being total gamble, impossible to learn. Thus, education is forfeited and risks are taken out of hope to hit a winning ticket. Outcome is not hard to predict...

So, instead of seeking a subject to blame, one needs just to learn to read the movement. If a particular movement cannot be read within one's approach, one needs to learn to stay away and wait for "his" market. Freedom to engage and disengage comes with self-responsibility.

Sheesh, who would have thought this topic turns into philosophy of trading :D
 
I built a scanner that
-looks to see what block trades are being done in stocks above its daily average.Example good might do 20 block trades a day and today its done 50
note a block trade is 10k shares and above

-have my scanner look to see which stocks the big boys are on the bid and offer and offer and how many times they are on each side.

the above 2 methods help me greatly
 
Yes, very informative Brandonf, thanks. Two questions though: When a trade is done in the third market, does the inside best bid/ask prices change at all on level 2? Because sometimes I see huge orders go off in time and sales but level 2 is not affected. The chart also will show huge volume in just one certain time. Secondly, are these signs of third market activity?

I've been trading for 9 years but never bothered to look into these important matters. Its time that I do this. Thanks a lot for your insights.
 
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