Who are daytrader's counterparties?

T

Traden4Alpha

Although I do not daytrade (and probably never will), I am interested in the intraday patterns in the market because that affects the daily OHLC and volume (I trade multiday swings from EOD data). Day trader behavior also determines how my order execute, whether I use MOO, limit, or stop orders.

Anyway, I got to wondering about the impact of daytrader's single-minded tendency to be flat overnight and in the market intraday. Seems like it would generate a rather interesting flow of capital into and out of the markets on a daily basis.

Although its possible that bullish day trader's buys in the morning cancel out bearish day trader's sells (and recancel later in the day), this seems a little too neat to be likely. Thus, everyday there must be some net flux of positions based on deployment of capital by day traders. Since every buyer must be matched to a seller, there must be some class of "nighttraders" to complement the set of "daytraders."

Any ideas on the identity of these nocturnal counterparties to the day trader's entries in the morning and exits in the afternoon???

Thanx for the flow of ideas on the flow of capital,
Traden4Alpha
 
not many big players in e mini, just a bunch of little guys. So it is mostly just us settling up. No big deal, because whatever the price, that's the price and win lose or draw we all take it.

Funds have a lot of money to move, and usually try to move it on the open and close when volume can accomodate them.

Some think big money tips it's hand. What happens in stocks happens in futures and what happens in sp happens in es. So even though the money is not being moved in es, es will still act like it is.
 
It's hard to understand where you are going with this. probably it's just me.
some things to remember :

- you never know if your counterpart just entered or exited. ie if you enter long, but I sell you short, we are both entering a trade. think about this one (!).

- it is impossible to know if the counter part is (was) holding for 3 seconds, 3 days, 3 months or 3 years.

- if you are a multi swing trader, you still need to be executed 'intraday'. this is true for any market participant.
since everyone needs to be executed 'intraday' then everyone can be a counterpart : institutions, specialists, traders (multi or day), retail investors, etc..

- daytraders represent a very small part of the volume. we are always described bigger than we are (by the media, hype etc..)

- volume distribution is usually a U shape.
transactions are concentrated in the first hour or so (maybe first 2 hours) and at the end of the day. this is because most volume is institutional, not traders.

- traders can exist because they facilitate transactions between institutions (and retail in a smaller proportion). There would be no market if they were only traders (or a majority of).

daytrader being flat, is only a risk control instrument. just as swing traders NOT being flat [it would kill your trades to do the opposite].
institutions balancing assets is also a risk control instrument. there is no wrong or right, or even better or worse. it's only a matter of using the right tools for the strategy you are following.

tntneo
 
what you really need is intraday open interest. I'm still marvelling that we have intraday volume, that was never available in years past.

Not sure if you can get intraday open interest, but that would tell you if it is just daytraders settling up, or overniters taking the other side.
 
now I'm just talking futures, where contracts only come into being when two new sides come into the market.

Stocks are different. That share of stock is going to be out there whether anyone wants it or not.
 
so traden4, you need to specify if you are talking futures or stocks.

If 2 futures traders offset each other, then that contract no longer exists, and nobody has to hold it overnite.

stocks? you are right, somebody has to hold overnite. But in the brave new world, anybody can hold and still be neutral.

But to get practical, after a big down day, you figure the shorts are so fat they aren't going to fight over a few ticks on the close, so they get a little loose. And any surviving longs probably came in late in the day, so they are the ones in at a limit, while the smiling shorts just exit at the market. Hence the so called short covering bounce on the close.
 
<b>Offsetting Trades Leads to Chaotic Bifurations</B>

<b><i>tntneo said:</i> "if you enter long, but I sell you short, we are both entering a trade. think about this one (!)."</b>
Very interesting. This sounds like what profitseer said about futures:
<b><i>profitseer said: </i> "I'm just talking futures, where contracts only come into being when two new sides come into the market."</b>
The notion that a transaction is an entry for both parties has far reaching implications. And the situation is more common than many might think. It applies to short sales, futures, options, and even ETFs like QQQ (which can be "created" in 50,000 share creation units).

It is a very interesting situation because it means that there are two traders "in the market" who are on opposite sides of the greed/fear emotional spectrum. It means that for a time, there will be equal amount of open profit and open losses (one party is sitting on an open profit , while the other is sitting on an equal, but opposite open loss). And, whoever exits their position first will amplify the P&L of their counterparty. Sounds like a very powerful mechanism for chaotic bifurcation. COOL!

<b><i>profitseer said: </i> If 2 futures traders offset each other, then that contract no longer exists, and nobody has to hold it overnight."</b>
This means that short day traders (who created and sold a futures contract in the morning) are buying back the contract from long day traders at the end of the day. Interesting. Too bad nobody knows the intraday open interest.

<b>Stocks vs. Futures: Why no Holy Grail</B>

<b><i>profitseer said: </i> so traden4, you need to specify if you are talking futures or stocks."</b>
Very good point. But, I meant for it to be ambiguous because I am trying to understand the Markets with a capital "M." That some markets have a fixed float (stocks) while others have a variable float or open interest (futures, options, etc.) means that methods that work for one tradable do not work for another tradable. The expression of emotion and bounded rationality will be very different in a market with participants on only one side vs. one with participants on both sides. No wonder there is no Holy Grail trading method.

But this issue is not so black and white (100% fixed float for stocks vs. 100 variable open interest for futures). For futures, especially commodities, there is a group of participants (hedgers) that create an unchanging baseline of open interest with long or short positions that are held until expiration. These participants do want to transact the underlying good and are not subject to the same open P&L, profitability, and trading emotions of the speculator. The extent that these patient hedgers sit on their positions while speculator counterparties trade means that a futures market can be biased toward the short-term traders being net long or net short. Hmmmm... I'll have to think more about the implications of this one.

<b><i>profitseer said: </i> "Stocks are different. That share of stock is going to be out there whether anyone wants it or not."</b>
ROTFLMAO!:D Ain't that the truth! I know -- in the bad old days of buy'n'hold I owned some stocks that nobody wanted. LOL!


<b>Distribution of Holding Times: Can We Know It?</B>

<b><i>tntneo said:</i> "it is impossible to know if the counter part is (was) holding for 3 seconds, 3 days, 3 months or 3 years"</b>
Sad, but true if we are talking about particular trades. But, on average, can't we look at a number of indicators to gauge the distribution of holding times? A good one might be float/volume or open interest/volume. Also data on some segments may be useful. We can readily estimate the holding times for insiders because their holdings and trades are public. In the futures markets, the Commitments of Traders data helps us distinguish between hedgers and speculators. And statistics on institutional holdings and retail brokerage trading provide some insight into the buy-and-hold crowd. Even the postings on ET can help us estimate which tradables have a preponderance of short holding-time daytraders. Its meager ambiguous data, but it does let us estimate some bounds on the distribution of holding times for different tradables.


<b>Daily Volume Patterns: Herding Behavior</B>

<b><i>profitseer said: </i> Funds have a lot of money to move, and usually try to move it on the open and close when volume can accommodate them </b>
<b><i>tntneo said:</i> "volume distribution is usually a U shape. ... this is because most volume is institutional, not traders. "</b>
This is classic herding behavior -- clustering together for protection from bad executions that could occur during the thinly traded middle of the day.

<b><i>tntneo said:</i> traders can exist because they facilitate transactions between institutions (and retail in a smaller proportion)"</b>
The interesting question is one of how the institution buyers vs. institutional sellers distribute themselves over opening vs. closing. If institutions cluster to either end of the day, then day traders create a mechanism for carrying order imbalances from the morning to the afternoon. But, then there must be some "nighttraders" who carry the closing order imbalance into the morning (or into the extended hours trading). Interesting stuff.


May all your counterparties be dumb money,
Traden4Alpha
 
Your assumption, I believe, is way off base...You think only small fries are in the minis?...No way...There is very large money running around in that market
 
There is no way one could answer this question with a quick and convenient answer...It depends on any number of factors...Included in the big equation might be trend strength and duration(time and price)...seasonality(including earnings announcements, end of quarter stuff)...

Personally, I feel that the markets nowadays lack the "residual momentum" of 2-3 years ago...I dont trade stocks, but I watch them on my screen, particularly the most heavily weighted stocks in the SPX, OEX, etc...Alot of the movement looks and feels like it is program related...Mark up and mark down happens much more quickly, as if they want to establish price much more quickly...The follow through off of the breaks may have dissipated because the retail flows have diminished substantially, therefore, making the action less predictable at areas which were once very predictable in a bull market...

Lets face it...With hedge funds attracting enormous speculative capital, mutual funds liquidating many of their core holdings, program trading accounting for a bigger share of the pie each and every day...this is a market of pros versus other pros...Its a masterful game of chess all day, every day
 
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