sandpiper
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jezza,
I wouldn't throw the baby out with the bath water.....
Certain aspects of institutional behaviour are undoubtedly interesting to know about, observe and acknowledge in terms of their impact on the markets. However, the fact that they don't use the same methods as we do on the retail side isn't really a valid reason for laying waste to those 90% methods and indicators (as you put it). Apart from the fact that institutions are not always right, the fact is that there is a huge difference between how you would execute a purchase of millions of shares of a FTSE 100 company and executing a purchase of 1000 shares of A NASDAQ company. Clearly, nobody in their right mind is going to buy large quantities of shares on a break-out for a start. So, by necessity, the institutions have to use different methods to get their business done.
Trend-lines, MACD, Pivots and of course price can all be used as part of a systematic method for entering/exiting a market by establishing the statistical significance of certain patterns of development/behaviour.
However, there is a huge difference between on one hand acknowledging that this stuff can be useful as part of a plan/method and on the other suggesting that these have any bearing on how/why the market moves the way it does. You can argue (and it would be fair enough) that you don't need to know why the market moves from A to B in order to capitalise on it. To paraphrase Tom Cruise in 'Days of Thunder', you don't necessarily need the vocabulary.
As a concrete example. I've always liked the so called "floor trader pivots". For me they are a useful means of quickly comparing the relative strength/weakness of different markets. There is even some useful work by John Jackson on the statistical significance of the zones between pivots. Of course they can be used as a means of determining when to enter or exit a particular market. Together with sensible risk/money management they can undoubtedly be used profitably. Do locals and institutional desks fall over each other to buy or sell when the levels are reached or breached? No, of course they don't. Does it make them any less useful as a potential "tool" that they aren't really "Floor Traders Pivots"? I would suggest not.
I wouldn't throw the baby out with the bath water.....
Certain aspects of institutional behaviour are undoubtedly interesting to know about, observe and acknowledge in terms of their impact on the markets. However, the fact that they don't use the same methods as we do on the retail side isn't really a valid reason for laying waste to those 90% methods and indicators (as you put it). Apart from the fact that institutions are not always right, the fact is that there is a huge difference between how you would execute a purchase of millions of shares of a FTSE 100 company and executing a purchase of 1000 shares of A NASDAQ company. Clearly, nobody in their right mind is going to buy large quantities of shares on a break-out for a start. So, by necessity, the institutions have to use different methods to get their business done.
Trend-lines, MACD, Pivots and of course price can all be used as part of a systematic method for entering/exiting a market by establishing the statistical significance of certain patterns of development/behaviour.
However, there is a huge difference between on one hand acknowledging that this stuff can be useful as part of a plan/method and on the other suggesting that these have any bearing on how/why the market moves the way it does. You can argue (and it would be fair enough) that you don't need to know why the market moves from A to B in order to capitalise on it. To paraphrase Tom Cruise in 'Days of Thunder', you don't necessarily need the vocabulary.
As a concrete example. I've always liked the so called "floor trader pivots". For me they are a useful means of quickly comparing the relative strength/weakness of different markets. There is even some useful work by John Jackson on the statistical significance of the zones between pivots. Of course they can be used as a means of determining when to enter or exit a particular market. Together with sensible risk/money management they can undoubtedly be used profitably. Do locals and institutional desks fall over each other to buy or sell when the levels are reached or breached? No, of course they don't. Does it make them any less useful as a potential "tool" that they aren't really "Floor Traders Pivots"? I would suggest not.
charliechan
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we (i) cant use order flow so much because i dont have a list of customer orders to front run!
fundamentals are mainly used for longer term decisions. i am a day trader.
that leaves news based events and technical levels.
mostly, i use bar charts (not candles) and volume to see where technical levels are. i sometimes have a good idea where order flow is located and at what levels based on this (from my time on the floor). most of my trading is done around these levels - like bramble says, knowing how to hang on to the coat tails pays well. big money tends to trade around these levels sometimes. the other 50% of my decision process is based off of the prints - time & sales, related markets, etc.
i dont use any indicators (other than volume) and no technical patterns like triangles, head & shoulders etc. thats witch craft to me.
fundamentals are mainly used for longer term decisions. i am a day trader.
that leaves news based events and technical levels.
mostly, i use bar charts (not candles) and volume to see where technical levels are. i sometimes have a good idea where order flow is located and at what levels based on this (from my time on the floor). most of my trading is done around these levels - like bramble says, knowing how to hang on to the coat tails pays well. big money tends to trade around these levels sometimes. the other 50% of my decision process is based off of the prints - time & sales, related markets, etc.
i dont use any indicators (other than volume) and no technical patterns like triangles, head & shoulders etc. thats witch craft to me.
charliechan
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jmreeve
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Jezza
these points maybe true on some banking desks but are not true across the board.
The buy side is different and quant funds for instance, would certainly not laugh at mean reversion as a
useful strategy.
The point is that market participation is heterogeneous and this is part of the reason why the markets prices end behaving very much like a random walk.
these points maybe true on some banking desks but are not true across the board.
The buy side is different and quant funds for instance, would certainly not laugh at mean reversion as a
useful strategy.
The point is that market participation is heterogeneous and this is part of the reason why the markets prices end behaving very much like a random walk.
sandpiper
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jmreeve,
Very true. Sell side guys to tend to suffer from an inflated sense of their own self-importance. I've even seen 'em laugh at a prospective hedge fund client who did use mean reversion..... Although they didn't get the business directly, the hedgie went off and executed through someone else, so mission complete anyway.
jezza,
"I make good money trading the way I do now and I'm in no rush to change, but I do think its important, even vital, to understand how the market movers, make the markets move."
Can't argue with that. Context is useful.
"There must be some relevance in these points though...."
Yes, of course. But it's horses for courses. Taking the example of a special situation of merger arb play that I briefly highlighted before:
Step 1) The sell side institution sales traders spend weeks compiling the case for a merger arb play.
Step 2) They convince their top tier clients of the value of the play, get them on board. They start building positions for these clients (and themselves). Clearly they are not waiting for a MACD crossover or test/cross-over of a trend line in order to buy. However, the basis on which they have sold the play to their clients necessitates acquiring blocks of stock within a certain price spread so their sales-traders/traders will probably try and work the stock lower in order to buy.
Step 3) Once the positions are established, they start "releasing" the analysis to second tier clients and analysts from other institutions who haven't yet spotted the opportunity.
Step 4) Some of their second tier clients take up the opportunity and they can cross these with the clients already in.
Step 5) The Financial Times picks up a story on the stock second hand and publishes.
Step 6) Retail traders may start to pile in.
At any point, from stage 3 onwards, the stock(s) in question may exhibit behaviour that alerts traders using technical analysis. If there is sufficient momentum in the stock, they may even profit from their technical analysis. So, whilst the sales-traders who perform the initial analysis would never ever use technical analysis, their execution specialists (if they are smart enough) might (but in completely the opposite way to that used by most retail traders. In other words, they may paint the chart.... in an attempt to create the supply that they need to execute within a certain price spread.
The tier 1 Investment Banks and their prop desks that Charlie talks about are, of course, a different story again. It's six hundred pound gorilla stuff. EDIT: and then there is the buy side with their algorithms, etc, thanks JM).
I've never read Reminiscences but I gather all of this kind of stuff is pretty much covered in there. Borsellinos book tells how, when he was on the floor, everyone started front-running him so he had to build his real position through a broker whilst appearing to be doing completely the opposite as far as the boys on the floor were concerned.
Screens.... I also use bar charts (5 minute, 30 or 45 minute, daily on the same chart). Volume (low, average, high or very high) and time and sales. This is for each of the US futures markets that I look at. I'm interested in daily highs/lows for the last 2 to 3 days, yesterdays closing range, todays opening range and the high/low from last week/this week. I pull up the pivots if it looks like there is no paper around and as a means of comparing markets.
Very true. Sell side guys to tend to suffer from an inflated sense of their own self-importance. I've even seen 'em laugh at a prospective hedge fund client who did use mean reversion..... Although they didn't get the business directly, the hedgie went off and executed through someone else, so mission complete anyway.
jezza,
"I make good money trading the way I do now and I'm in no rush to change, but I do think its important, even vital, to understand how the market movers, make the markets move."
Can't argue with that. Context is useful.
"There must be some relevance in these points though...."
Yes, of course. But it's horses for courses. Taking the example of a special situation of merger arb play that I briefly highlighted before:
Step 1) The sell side institution sales traders spend weeks compiling the case for a merger arb play.
Step 2) They convince their top tier clients of the value of the play, get them on board. They start building positions for these clients (and themselves). Clearly they are not waiting for a MACD crossover or test/cross-over of a trend line in order to buy. However, the basis on which they have sold the play to their clients necessitates acquiring blocks of stock within a certain price spread so their sales-traders/traders will probably try and work the stock lower in order to buy.
Step 3) Once the positions are established, they start "releasing" the analysis to second tier clients and analysts from other institutions who haven't yet spotted the opportunity.
Step 4) Some of their second tier clients take up the opportunity and they can cross these with the clients already in.
Step 5) The Financial Times picks up a story on the stock second hand and publishes.
Step 6) Retail traders may start to pile in.
At any point, from stage 3 onwards, the stock(s) in question may exhibit behaviour that alerts traders using technical analysis. If there is sufficient momentum in the stock, they may even profit from their technical analysis. So, whilst the sales-traders who perform the initial analysis would never ever use technical analysis, their execution specialists (if they are smart enough) might (but in completely the opposite way to that used by most retail traders. In other words, they may paint the chart.... in an attempt to create the supply that they need to execute within a certain price spread.
The tier 1 Investment Banks and their prop desks that Charlie talks about are, of course, a different story again. It's six hundred pound gorilla stuff. EDIT: and then there is the buy side with their algorithms, etc, thanks JM).
I've never read Reminiscences but I gather all of this kind of stuff is pretty much covered in there. Borsellinos book tells how, when he was on the floor, everyone started front-running him so he had to build his real position through a broker whilst appearing to be doing completely the opposite as far as the boys on the floor were concerned.
Screens.... I also use bar charts (5 minute, 30 or 45 minute, daily on the same chart). Volume (low, average, high or very high) and time and sales. This is for each of the US futures markets that I look at. I'm interested in daily highs/lows for the last 2 to 3 days, yesterdays closing range, todays opening range and the high/low from last week/this week. I pull up the pivots if it looks like there is no paper around and as a means of comparing markets.
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charliechan
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jmreeve said:
LMAO!!!!
watch out! hard hat strapped firmly on!
youre gunna get bitch slapped now for saying that! (not that i disagree - but many will)
when i used to trade stocks, my broker would often auto route my orders to knight if i used market orders/auto route. i started to notice that whenever i exited the trade, i would ALWAYS get 3c slippage. none going into the trade, but ALWAYS 3c getting out!
now i know why!
jezza888
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Be that as it may, if anyone does disagree about SB's, please find another thread to do so!
CC - that is a great article
All,
Are you all now retail traders from home or.....? Do you find it easier or harder away from the thick of it without the extra information to hand?
CC - that is a great article
All,
Are you all now retail traders from home or.....? Do you find it easier or harder away from the thick of it without the extra information to hand?
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TheBramble
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Great question. Was going to ask something similar last night, but didn't want to cross your thread.jezza888 said:
Never been a pro so would also be interested in responses from those that have been (are).
TheBramble
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Useful post tsuntzu. Always good to get a picture of how others are looking at things. I presume you could lock these guys in a room (perhaps they already are!) and feed them their curve data along with the raw meat and they'd be perfectly happy doing their plays as per the 'rules'. I presume they are a little more educated and aware than trained monkeys, but by the sound of it, not much. But I bet they don't care either. 
Interesting you mention Market Profile in this context. I'm in the middle of one of Steidlmayer's other books at the moment and this has caused me to analyse Cable characteristics over the last few days in relation to 'other time frame' participants. Not sure it was even intended to be relevant to a spot rather than futures market, but I am inclined to believe the same basic mechanics (not MM mechanics) moves most (all?) markets.
Interesting you mention Market Profile in this context. I'm in the middle of one of Steidlmayer's other books at the moment and this has caused me to analyse Cable characteristics over the last few days in relation to 'other time frame' participants. Not sure it was even intended to be relevant to a spot rather than futures market, but I am inclined to believe the same basic mechanics (not MM mechanics) moves most (all?) markets.
Directional
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there are details of LIFFE's Liquity Provider and Market Market schemes are viewable here:
http://www.euronext.com/editorial/wide/0,5371,1732_200498233,00.html (STIR's liquidity providers)
http://www.euronext.com/editorial/wide/0,5371,1732_200510161,00.html (Swapnote MM scheme)
I've never traded as a "designated market maker" and I have no idea what the requirements or obligations are, but I am registered as a "liquidity proivider" at LIFFE, as I'd imagine many of the posters in this thread are - it would seem to me that the difference is that a DMM gets all his exchange fee's back and a share in the exchange revenue from the fee's paid by the counterparty to trades that the DMM effects. A DMM might scratch all his trades but if he's doing the volume and meeting his quoting requirements, for every 10,000 lots he trades, at 10p fee share per ct he'd be bringing in a grands worth of paycheck from the exchange. I'd imagine any market maker worth his salt would be doing more than 10k contracts a day!
Liquidity provider rebates are scaled discounts on exchange fee's to encourage providing liquidity and depth further down the curve in the "back months", so the first four quarterly contracts are full price, the next two quarters are 5p off (front reds), 10p for the next two quarters (back two reds, months seven and eight), greens or months nine to twelve are 15p rebated and blues or months thirteen - sixteen are worth 20p back (80% rebate)
The majority of my trades would be in red and green months, working out at roughly a 50% discount on exchange fee's - not as sweet as having the exchange pay you for trading, but definately nice seeing a three or four figure sum credited back in your account at the end of the month, and way better than a swift kick in the balls!
Eurex operate a similar rebate scheme do they not? or is theirs more skewed towards volume thresholds rather than contract date?
http://www.euronext.com/editorial/wide/0,5371,1732_200498233,00.html (STIR's liquidity providers)
http://www.euronext.com/editorial/wide/0,5371,1732_200510161,00.html (Swapnote MM scheme)
I've never traded as a "designated market maker" and I have no idea what the requirements or obligations are, but I am registered as a "liquidity proivider" at LIFFE, as I'd imagine many of the posters in this thread are - it would seem to me that the difference is that a DMM gets all his exchange fee's back and a share in the exchange revenue from the fee's paid by the counterparty to trades that the DMM effects. A DMM might scratch all his trades but if he's doing the volume and meeting his quoting requirements, for every 10,000 lots he trades, at 10p fee share per ct he'd be bringing in a grands worth of paycheck from the exchange. I'd imagine any market maker worth his salt would be doing more than 10k contracts a day!
Liquidity provider rebates are scaled discounts on exchange fee's to encourage providing liquidity and depth further down the curve in the "back months", so the first four quarterly contracts are full price, the next two quarters are 5p off (front reds), 10p for the next two quarters (back two reds, months seven and eight), greens or months nine to twelve are 15p rebated and blues or months thirteen - sixteen are worth 20p back (80% rebate)
The majority of my trades would be in red and green months, working out at roughly a 50% discount on exchange fee's - not as sweet as having the exchange pay you for trading, but definately nice seeing a three or four figure sum credited back in your account at the end of the month, and way better than a swift kick in the balls!
Eurex operate a similar rebate scheme do they not? or is theirs more skewed towards volume thresholds rather than contract date?
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charliechan
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mr.marcus said:.....cable volume data is too thin to have any consistent value....euro is far better....believe me though without goin into detail.....spot is the dog...aptly so
i would question that - fx futures v spot market.
99.99% here who are trading 'spot' fx are not trading spot fx at all, just trading against a bucket shop who can and will make price according to their interests not yours. anyway, we all know this and its documented elsewhere.
have you ever considered how the real interbank market is structured?
- how much of the reported liquidity is spot, and how much on otc forwards?
- although the combined liquidity accross the entire fx market dwarfs that of futures, how much of that is just on eur/usd?
- take a look at the $liquidity on globex v that on say ony one of ebs, autobahn, hotspot etc.
get ready for an eye opener! you will probably find that as a central pool of liquidity, globex isnt the baby everyone thinks he is. hes grown up into a teenager with an attitude.
we could say the cash stock market is deeper in terms of & liquidity than the futures market, but we know which leads which and why.
what are the costs and risks involved in futures fx v interbank?
also....
consider what drives the fx market interms of intermarket analysis (the clue is in the carry trades - points the direction anyway). sometimes you start to realise it is neither the dog or the tail that is doing the wagging - but some other sneaky little fu*ker on the end of the leash!
cgoodwinca
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MM's, Volume, and YOU
Excellent posts here, I just stumbled onto this site and am glad I did.
I have observed that mm's move the market when it is slow, when daytraders enter and exit, and thus inflate an artificial volume and price activity.
What does this mean to 'us'? It means that some of a chart is purely artificial in price and volume. I believe that trading stocks with unusually high volume only, and patterns with high trade rate and volume increasing 'post set up' of a pattern or into a trend are the only ways to identify 'what is real'. Even a stocks 'average volume' for any day can be artificial at times. All this explains failed setups and why a stock does not act as predicted once you, a daytrader, enter. Spikes are mm's taking out stops, thus explaining the up and back action. It's not random, it's a slow period and opportunity to take out loose hands of daytraders. (So look for unexplainable spikes and play it. Panic sell offs, short squeezes, runaway momentum...these are the daytraders purest trades with no mm's to battle with / charts to figure out if the movement is 'real'.
Excellent posts here, I just stumbled onto this site and am glad I did.
I have observed that mm's move the market when it is slow, when daytraders enter and exit, and thus inflate an artificial volume and price activity.
What does this mean to 'us'? It means that some of a chart is purely artificial in price and volume. I believe that trading stocks with unusually high volume only, and patterns with high trade rate and volume increasing 'post set up' of a pattern or into a trend are the only ways to identify 'what is real'. Even a stocks 'average volume' for any day can be artificial at times. All this explains failed setups and why a stock does not act as predicted once you, a daytrader, enter. Spikes are mm's taking out stops, thus explaining the up and back action. It's not random, it's a slow period and opportunity to take out loose hands of daytraders. (So look for unexplainable spikes and play it. Panic sell offs, short squeezes, runaway momentum...these are the daytraders purest trades with no mm's to battle with / charts to figure out if the movement is 'real'.
