Why DOM is Deceiving

This is anecdotal stuff. I'm not contesting that this may well be what the flipper is up to, but it really is a stretch to suggest that the major force in price formation in the markets is flipping.

It is the interplay of supply and demand in the auction market where price is set. This is where the more passive participants who submit non marketable limit orders meet up with the more active participants who submit marketable orders.

On the ACV thread there was a good post suggesting that a valuable paradigm is to think in terms of long supply/long demand and short supply/short demand.

Having an an excess of contracts on the ask (long supply) and price still going up further does not mean that the book is "deceptive". It may just mean that long demand is exceeding long supply. Volume and traded bid/ask difference is a very good hint as to the demand side of the equation - T&S if you like. The DOM only shows the long and short supply which of course can change in the event of limit orders being cancelled.



Quote from Paulds11:

Quote from online source regarding Paul Rotter and his Flipping activities

"For those who don't understand why people are annoyed with the conduct of Mr Rotter. People have no problem with him being there for size, if he wants to stick 10,000 up in the Schatz then bully for him. What people object to is when he flips the Bund, Bobl and Schatz together. For example yesterday morning,

Schatz 81 bid on 6,000.

Bobl 59 choice.

Bund 71 bid on 500.

He takes the bobl 59 offered on 300 and then flips the Schatz 81 offered on 5,000, Bund at 70 hard and the the Bobl 58 and 57 offered in quick succession. That is what people are annoyed about. With regard to the size i have seen him hit for 10,000 schatz. Then come back in for another 20,000 on the bid and proceed to push the bund up 4 ticks to insure he could make money on the paper order the traded against him. Paul Rotter has so much funds at his desposal that he can do what he likes, and even the biggest locals can't touch him. "

So you want to put your faith in DOM prices? think again..
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Paul,

If you think that getting to know yourself is more important than probability of trades, and to think otherwise is for novices, then so be it. My experience tells me otherwise. Douglas’s book is very important, no doubt, but the trader will only fully get his staff after being in the markets for some time.

Regards,
redduke
 
Dom can be used to ones advantage. This is one of the ways I use it. If I get a long signal and there is a wall (large size) on the ask, I will not go long unless the wall is penetrated. However, if I get a short signal, and there is a wall on the ask, I will take it, since the wall will act as resistance and therefore the probability of the trade working out is good. Opposite for bid of course.

Also, this is where stuff from ACV thread comes into picture. If the wall is breached in the direction of higher ACV ratio, the probably of the momentum to continue is very high.
 
Quote from RedDuke:

Also, this is where stuff from ACV thread comes into picture. If the wall is breached in the direction of higher ACV ratio, the probably of the momentum to continue is very high.
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Very good point. The DAX, in particular can on occasion leap any wall it likes and keep on going, though the ACV ratio is then inclined to drop off a bit.
 
Here's some observations on DOM from the Gospel of Pabst.

1. In arbitragable financial futures, i.e. Index, Currency and Treasuries much of the size is dependant on the underlying cash market remaining at a particular level. For example a program might be willing to sell 400 ES at 1450 if he can buy the basket at 1444. If stocks go bid he's off his offer in futures.

2. On heavy volume days size trades to size. A book filled with "big" bids will see those orders trade out if volume is sufficient. Conversely in a slow market size will defend levels.

3. Iceberg orders spark little discussion here. Other than Globex I don't know what exchanges allow them. In ES they've become VERY prevalent. If you're long and you're pumped because that measly 71 lot on the offer is trading, I suggest curb your enthusiasm. It could be an iceberg with a 1000 more to go.

4. Trying to "read the book" has cost me more than it's made me.
 
Quote from increasenow:

When considering the ES...here is why DOM "depth of Market" is deceiving...let's say that the "wall" if you will is +4,000 at the "ask" side or "buy orders"...well that can mean 2 things:
#1-orders to buy believing that market will go higher
#2-orders for shorts to cover/lock in profits and no real sentiment of where market will go

...so, really nothing can be gathered as far as future "price action" from the DOM...do you concur or am I not seeing something...this is a serious post and not joking...thanks!
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No, the Market Depth is very important in ES. Size on the inside and mid-distance bid or ask clues you into where MM's will be moving price. If on the ask side, then up; bid side, then down.

The reason for this is that size is placed on the book at price tiers where price will be moving, so that MM's are buyers (bid side) / sellers (ask side) of choice on the book, and therefore enjoy price advantage.

If you join the inside ASK to sell, you are behind those 4,000 contracts offered for sale; and you will never be filled at that price because MM's are there ahead of you in ES certainly. You can only be filled if the bid lifts to that price, which means that MM's have pulled their ASK to the next higher level, leaving you holding the bag :) That makes you "retail", whereas MM's are "wholesale" sellers and make the bid/ask spread, while you pay the bid/ask spread.

These measurements are difficult to make, but that's how it generally works. Can be hard to evaluate visually. This is the result of my own research and that's a bit different from what most people intuitively think. By gaining access to the Market Depth data, these things can be calculated.

Yes, occasionally there is "spoofing" but not that much, so generally that's the rule for something like ES, YM, etc.

By the way, trades to the ASK for smaller "retail" traders are not on the book; instead, ASK contains offers to SELL for larger market maker entities who trade against the smaller players. I always look at the market from the perspective of MM's for daytrading.

FS
 
Quote from FutureScalper:

By the way, trades to the ASK for smaller "retail" traders are not on the book; instead, ASK contains offers to SELL for larger market maker entities who trade against the smaller players. I always look at the market from the perspective of MM's for daytrading.

FS
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Not following you here. All orders at the ASK are shown, whether it is Goldman or 1 lot trader. If a trader have put limit/stop, it will show up there.
 
Quote from RedDuke:

Not following you here. All orders at the ASK are shown, whether it is Goldman or 1 lot trader. If a trader have put limit/stop, it will show up there.
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I was talking about a retail buyer never showing up on the ASK because he buys the ask from someone selling at the inside ASK, and these are "market makers" who are sitting there offering to sell.

Yes, of course. If the trader puts a limit to sell at the inside ASK, it will show up as the 4,001th single contract offer to sell, behind the other 4,000 existing contracts offered for sale. It's the time price priority on the exchange, like Globex, which is "first at that price level" is seller (ASK) at that price level if a buy order is matched to that price.

The only things on the ASK side are offers to sell which cannot be immediately matched at the prevailing price. The only things on the BID side are offers to buy which cannot be immediately satisfied. These are, of course, limit orders; because market orders by definitions are satisfied by buying the best ASK and selling to the best BID price.

If the market DOES NOT MOVE, and assuming the ASK size doesn't change, retail buyers (to the ASK price) will buy 4,000 contracts from the MM's before you, the 4,001th is ever satisfied.

That's not gonna happen, so you will not get filled in your sell limit order at the inside, UNLESS the market lifts by 1 tick (always assuming a 1 tic constant bid/ask spread).

THIS IS IMPORTANT: You will not get filled by your offer to sell at the INSIDE unless the market lifts 1 tick up, thus leaving you alone perhaps at the inside ask and the rest of the MM's in the market at the next higher ASK price level. Your price level specified by the limit order is now equal to the INSIDE BID price. You have just sold at "retail price" (you are paying the bid/ask spread). You might have the illusion that the limit order means you got as good a price as MM's could get, but you didn't and you can't, because they were there first, they have squeezed you and kept you out, and because the market needs to move before you can sell at that price, since you were behind 4,000 other contracts to sell as that specific market moment.

Am I missing something here about what you're asking?

FS
 
Nope, we are on the same page. I misread your post. As far as fills go, it does not concern my style of trading, since I get in with market order. For me being filled is more important htan saving 1 tick on bid/ask spread.
 
well as the thread starter...In summary, it seems as if using the DOM truly is a "landmine" that can blow any account...thanks all for your help!!!...I'm more learned now!!...synopsis...stay away from it and use the MACD :D
 
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