Understanding Depth
- Thread starter StreamlineTrade
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StreamlineTrade
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Thank you Stalker. That seems to be quite logical!
I should point out that I am not a scalper, and my method does not require looking at depth or Time and Sales all day. My reason for asking was purely from an educational stand point.
I do not consider myself to be a great trader by any means. I am just trying to get a better understanding of the markets generally, and this did seem counter intuitive like others have pointed out.
From my observations, it would seem that sometimes the size is pulled and the market continues. Sometimes it takes quite a while for the market to eat that inside size, and the size stays there without being pulled, or is refreshed. This is when the market zipps off in the other direction.
I think you have to watch that size for a while though to get a feel for it. It may take a few hits to determine what the reaction could be.
I think I need some more experience before I make any solid conclusions though. Like I said, although I am not a scalper, this education could help me decide if I should dump my position or stick with it.
ST
what is the principal makeup of the order book - there (a) designated market makers who are required to supply bids/offers to maintain the exchange's set max spread (b) arb/counter players showing big sizes and (c) others - let's say the "normal" bid/ask size is 100-300 per level on ES without the huge sizes from group (b) - this group (b) makes money because when the market moves a few ticks one way, it often quickly moves back the other way, that's the nature of liquid markets - so these big size players put their bids/offers just a bit outside of the inside quote hoping to get hit and to flip quickly - so when the market is not moving, they are on both sides and you see big sizes on both sides - when the market is moving, these guys never chase of course, because they make money on a push the other way - so you only see the market makers plus others following but these big size guys are always on the other side of the move, they have to be, they always play for a push back.
by the way the "flipper" phenomenon just reflects the nature of liquid markets - look at forex which is the largest liquid market - why would all the big forex player banks always stand by to provide huge liquidity - why would citibank or bear stearns would be ready to sell you a billion worth of currency just on the spot, at any time, any huge amount? - only because they know in the end they will make money because there is always more noise than direction in a liquid market - i.e. in a liquid market, the big size is always on the "other side".
Thanks Fader for sharing your wisdom it helps me understand,
To add to this conversation here is somthing that I have observed. What I have noticed and I am no expert just trying to understand depth myself is this:
Lets say the ES market is selling hard we move down to a clear support area, the market stalls and is supported for a bit, but the overall market is heavy with selling... we don't see much of a bounce, it should bounce more that it did. Then you look at the depth and see like huge contracts on the Bid (ask Price) (like an outrageous amount) the large size may be 3-4 levels deep. the size depends on what kind of volume the es is trading at so the large bid size will be different in different market conditions to accomplish what is they are trying to do.
So now what does the average trader see? we are at support and there is a large stack of Bids (= ask price) supporting the market (it appears as if there are more buyers then sellers now at support) this is what the Big boys want you to think. So this lures in more buyers and the illusion is in place so big boys can Offer out (bid price) more contracts to accumulate there short position. this may take some time and it papers as a stall, more people start either covering there shorts from above and even reverse to take new long position. new traders enter to scalp a small above seeing the support.
So then what happens after some time manipulators have accumulated enough, they suddenly pull the Bids ( in a blink of an eye all that huge volume disappears and the market continues down to the next level and totally dumps. You can get a good feel for what is happening by watching this dynamic. this usually will take place before most moves. I will warn it seems that certain players are responsible for this and if they are not playing then what is, IS ... so what I am saying is as in any trading you need to trade when you can identify what players are in the market. what happens when the market is slow and no volume? equals not a good trading environment.
This is just what I have witnessed and observed in the depth. if anyone would like to add to this be my guest. I am still trying to understand the depth of market. If there are any wise traders who can add to this and help with the understanding I would appreciate any contributions. if some are shy and don't want to speak in a public form you can PM me. thanks
Take Care
Lotus 7
To add to this conversation here is somthing that I have observed. What I have noticed and I am no expert just trying to understand depth myself is this:
Lets say the ES market is selling hard we move down to a clear support area, the market stalls and is supported for a bit, but the overall market is heavy with selling... we don't see much of a bounce, it should bounce more that it did. Then you look at the depth and see like huge contracts on the Bid (ask Price) (like an outrageous amount) the large size may be 3-4 levels deep. the size depends on what kind of volume the es is trading at so the large bid size will be different in different market conditions to accomplish what is they are trying to do.
So now what does the average trader see? we are at support and there is a large stack of Bids (= ask price) supporting the market (it appears as if there are more buyers then sellers now at support) this is what the Big boys want you to think. So this lures in more buyers and the illusion is in place so big boys can Offer out (bid price) more contracts to accumulate there short position. this may take some time and it papers as a stall, more people start either covering there shorts from above and even reverse to take new long position. new traders enter to scalp a small above seeing the support.
So then what happens after some time manipulators have accumulated enough, they suddenly pull the Bids ( in a blink of an eye all that huge volume disappears and the market continues down to the next level and totally dumps. You can get a good feel for what is happening by watching this dynamic. this usually will take place before most moves. I will warn it seems that certain players are responsible for this and if they are not playing then what is, IS ... so what I am saying is as in any trading you need to trade when you can identify what players are in the market. what happens when the market is slow and no volume? equals not a good trading environment.
This is just what I have witnessed and observed in the depth. if anyone would like to add to this be my guest. I am still trying to understand the depth of market. If there are any wise traders who can add to this and help with the understanding I would appreciate any contributions. if some are shy and don't want to speak in a public form you can PM me. thanks
Take Care
Lotus 7
Hi
after re-reading your question I think my description explaines what you were asking about.
in short what happends is: in the dome lets say the average size would be 300 to 400 contracts you would all of sudden see maybe 1500-to 2000 or contracts or more stacked 3 deep holding the market up while they sell into the buyers that are lured in and then they will pull the rug.
its like the Shell game, Where is the ball now...............
I think that Fader's explaination was good also
Anyone else like to contribute to this.........
Lotus 7
after re-reading your question I think my description explaines what you were asking about.
in short what happends is: in the dome lets say the average size would be 300 to 400 contracts you would all of sudden see maybe 1500-to 2000 or contracts or more stacked 3 deep holding the market up while they sell into the buyers that are lured in and then they will pull the rug.
its like the Shell game, Where is the ball now...............
I think that Fader's explaination was good also
Anyone else like to contribute to this.........
Lotus 7
StreamlineTrade
Guest
Lotus 7 -
So you are saying that a large seller will place more bids into the market in order to attract yet more bids, so he can sell into these new bids. This creates the problem that his bids will be in front of the queue, so his own bids will be executed first against his own order(s). He must remove his own bids before attempting to hit the other bids right?
Fader -
Are you saying the big money is always on the other side of the move, trying to push the market the other way? This does sound a little strange as if most of the money is on the other side, then the move will stop and reverse. This is auction theory is it not? I think I understand that there must be liquidity providers such as market makers to take the other side, but surely they can not be the dominant force.
To play devils advocate though, I read somewhere that the large commercials are often accumulating on the declines and distributing on the rallies. This is because if a large commercial wishes to sell, he can not just do so at will, as his large orders will move the market against his own intentions. He must wait for a rally and sell into that rally. So, are the intraday moves in fact generated by the liquidity providers in order to allow the commercials to take their true positions? This would mean that the market makers (sell side) are not pushing against the intraday trend, but are in fact the commercials (buy side).
I am aware that my last two paragraphs contradict eachother. Yet to me, they both seem to provide explanations to the same puzzle. Just as there is more than one way to skin a cat, there semms to be more than one way to fool us out of our hard earned!
ST
So you are saying that a large seller will place more bids into the market in order to attract yet more bids, so he can sell into these new bids. This creates the problem that his bids will be in front of the queue, so his own bids will be executed first against his own order(s). He must remove his own bids before attempting to hit the other bids right?
Fader -
Are you saying the big money is always on the other side of the move, trying to push the market the other way? This does sound a little strange as if most of the money is on the other side, then the move will stop and reverse. This is auction theory is it not? I think I understand that there must be liquidity providers such as market makers to take the other side, but surely they can not be the dominant force.
To play devils advocate though, I read somewhere that the large commercials are often accumulating on the declines and distributing on the rallies. This is because if a large commercial wishes to sell, he can not just do so at will, as his large orders will move the market against his own intentions. He must wait for a rally and sell into that rally. So, are the intraday moves in fact generated by the liquidity providers in order to allow the commercials to take their true positions? This would mean that the market makers (sell side) are not pushing against the intraday trend, but are in fact the commercials (buy side).
I am aware that my last two paragraphs contradict eachother. Yet to me, they both seem to provide explanations to the same puzzle. Just as there is more than one way to skin a cat, there semms to be more than one way to fool us out of our hard earned!
ST
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StreamlineTrade
Registered: Dec 2005
Posts: 6
12-18-05 08:31 AM
Lotus 7 -
So you are saying that a large seller will place more bids into the market in order to attract yet more bids, so he can sell into these new bids. This creates the problem that his bids will be in front of the queue, so his own bids will be executed first against his own order(s). He must remove his own bids before attempting to hit the other bids right?
Fader -
Like I said I don't totally understand it either, but these players have deep pockets. the large size may start out under the current level. we would be at support already. Then it is as if they hold the market up till they are ready to let it go, watch and see for yourself. Now this dose not happen when certain players are not present. and in low volume days it may not take place at all.
This week will not be a good week to look for it. but who knows.
All i can say is this is an observation i have noticed and i don't totally understand it either, but it appears to take place with consistency. I have learned to read it and use it. WHY, or HOW I have no idea............I will say there are some very Large players in the ES........
StreamlineTrade
Registered: Dec 2005
Posts: 6
12-18-05 08:31 AM
Lotus 7 -
So you are saying that a large seller will place more bids into the market in order to attract yet more bids, so he can sell into these new bids. This creates the problem that his bids will be in front of the queue, so his own bids will be executed first against his own order(s). He must remove his own bids before attempting to hit the other bids right?
Fader -
Like I said I don't totally understand it either, but these players have deep pockets. the large size may start out under the current level. we would be at support already. Then it is as if they hold the market up till they are ready to let it go, watch and see for yourself. Now this dose not happen when certain players are not present. and in low volume days it may not take place at all.
This week will not be a good week to look for it. but who knows.
All i can say is this is an observation i have noticed and i don't totally understand it either, but it appears to take place with consistency. I have learned to read it and use it. WHY, or HOW I have no idea............I will say there are some very Large players in the ES........
I don't trade ES, but the same thing happens on YM. I think it is just a trick to get retail traders to jump in ahead of the bigger bids in order for the bigger players to get some size to short into. When I was trading nasdaq the market makers used to do the same thing on level II to try and support the stock on the way down and to get upticks to short into.
I've also noticed relatively larger cumulative bids on price declines and more offers while price rises. Both on Level II and ES/NQ/YM DOM.
fader made some good comments.
Here are some other discussions on the subject.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=48277&highlight=dom
http://www.elitetrader.com/vb/showthread.php?s=&threadid=33075&highlight=dom
An astute trader on another board some years ago was asked a similar question about DOM. His response was something to the effect that DOM wasn't much more than "eye candy".
I've witnessed the DOM on the YM at the 7:15PM ET open show a 3:1 sell order to buy order ratio only for price to be 20 - 30 ticks higher a few hours later.
Someone else, I think it was here on ET
,said that one way to view a lopsided DOM is that if there are way more buy orders showing than sells - who's left to buy?
As someone who has tried using DOM for scalping, I think he may have a point.
fader made some good comments.
Here are some other discussions on the subject.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=48277&highlight=dom
http://www.elitetrader.com/vb/showthread.php?s=&threadid=33075&highlight=dom
An astute trader on another board some years ago was asked a similar question about DOM. His response was something to the effect that DOM wasn't much more than "eye candy".
I've witnessed the DOM on the YM at the 7:15PM ET open show a 3:1 sell order to buy order ratio only for price to be 20 - 30 ticks higher a few hours later.
Someone else, I think it was here on ET
,said that one way to view a lopsided DOM is that if there are way more buy orders showing than sells - who's left to buy?
As someone who has tried using DOM for scalping, I think he may have a point.