Tips to avoid MM's as your counterparty

Option Trader · Feb 28, 2008

Can anyone suggest ideas how to avoid MM's as your counterparty? It seems commonplace (for situations that the stock can go either way*) that the stock always turns against the latest retail trader taking a position, whether short or long.

Please share your comments about A) what broker you would suggest, B) where to route your trades.

(P.s. I know there are situations that this issue isn't relevant, such as high volume stocks, and when the stock anyway is going in a particular direction)

Spectre2007 · Feb 28, 2008

if you monitor account size plus position bias, and if a large disparity exits between account sizes in biases,... then you know that the price will fade the smallest account size bias....

meaning if institutional investors are getting long, and retail investors are getting short,... then retail investors are screwed till they exit...

NY0BScalper · Feb 28, 2008

Quote from Option Trader:

Can anyone suggest ideas how to avoid MM's as your counterparty? It seems commonplace (for situations that the stock can go either way*) that the stock always turns against the latest retail trader taking a position, whether short or long.

Please share your comments about A) what broker you would suggest, B) where to route your trades.

(P.s. I know there are situations that this issue isn't relevant, such as high volume stocks, and when the stock anyway is going in a particular direction)

What you're talking about is called reading the tape.

athlonmank8 · Feb 28, 2008

Quote from NY0BScalper:

What you're talking about is called reading the tape.

not necessarily. Depends on how thin the stock itselfe is as well.

MM's don't trade against you. Everyone needs to blame poor execution on something else. Market manipulation is not a simple task. Most people who do it are the ones who lose money.

In all honesty you need to learn a new strategy or take some time off.

crgarcia · Feb 28, 2008

Quote from Option Trader:

Can anyone suggest ideas how to avoid MM's as your counterparty?

Trade with a longer time frame.

A tick more or less doesn't change anything, unless you are scalping.

And yes, stop blaming other people for your losses.

Option Trader · Feb 28, 2008

Quote from crgarcia:

Trade with a longer time frame.

A tick more or less doesn't change anything, unless you are scalping.

And yes, stop blaming other people for your losses.

For first year traders, blaming "other people" is YES very much in place. For experienced traders, I agree.

Option Trader · Feb 28, 2008

Quote from Spectre2007:

if you monitor account size plus position bias, and if a large disparity exits between account sizes in biases,... then you know that the price will fade the smallest account size bias....

meaning if institutional investors are getting long, and retail investors are getting short,... then retail investors are screwed till they exit...

My impression is the same. What do you mean by monitoring the above?

EricP · Feb 28, 2008

Quote from Option Trader:

Can anyone suggest ideas how to avoid MM's as your counterparty?

I'm not sure I understand what you're trying to accomplish. Probably the best way to avoid a market maker fill is to deal with a direct access broker. Discount brokers, such as E*Trade, Ameritrade, Fidelity, etc., typically send all of their order flow to market makers for execution.

That said, when I place an order (market or limit), I am hoping to get it filled (regardless of counterparty). I'm only interested in getting a fill, at the order price or better, and am not concerned with the identity of the counterparty.

Option Trader · Feb 28, 2008

Quote from EricP:

I'm not sure I understand what you're trying to accomplish. Probably the best way to avoid a market maker fill is to deal with a direct access broker. Discount brokers, such as E*Trade, Ameritrade, Fidelity, etc., typically send all of their order flow to market makers for execution.

That said, when I place an order (market or limit), I am hoping to get it filled (regardless of counterparty). I'm only interested in getting a fill, at the order price or better, and am not concerned with the identity of the counterparty.

I know someone who uses one of those brokers you mentioned, who has several times taken MAJOR positions in low volume stocks, and sold long term covered calls, and each time the stock tanked, even though each of those stocks had real good fundamentals.

The same applies for daytrades for short manipulations.

EricP · Feb 28, 2008

Quote from Option Trader:

I know someone who uses one of those brokers you mentioned, who has several times taken MAJOR positions in low volume stocks, and sold long term covered calls, and each time the stock tanked, even though each of those stocks had real good fundamentals.

The same applies for daytrades for short manipulations.

C'mon, now. If that were true ("excellent fundamentals" and only falling due to nasty market maker "manipulations"), then your friend could just double up and buy even more of the fantastic company at 'bargain' prices.

I think the lesson he/she needs to learn is to never put on a large position in an illiquid stock. That's just asking for trouble. Seriously, think about it. Assuming that the stock really is an excellent stock at the price it's trading, then you will be unable to get the number of shares you want (maybe you are able to buy 10% of what you want). However, if the stock is in trouble, and some poor bag holder has a lot of shares that he wants to unload, then you'll get filled for every share you want to buy, and the stock works its way against you, as you describe. Goes your way on 10% of your desired size, versus goes againt you on 100% of your desired size => not a recipe for success. Large positions in illiquid stocks... Don't do it.

For what it's worth, my personal rule of thumb is that I never want to be holding a position that exceeds ~2% of the average daily volume of a stock. If the stock trades 500k shares per day, then I can hold up to 10k shares. But, if the stock only trades 75k shares per day, then my limit is only 1500 shares. You never want to be the elephant trying to get in and out of a position. Being 'small', and therefore capable of always being nimble, is the #1 advantage of being an independent trader (versus a hedge fund or institutional trader). Don't give up that advantage.