Say T&S shows that 50 contracts were on the ask, does it mean
- people were waiting on the bid and 50 offers to sell came in?
50 contracts traded at the ask are traders coming into the market to BUY; they are BUYING 50 contracts for the price that the market maker is ASKING for them (inevitably more than he will buy them for)
Similarly
50 contracts come through the T&S at the BID - a trader has come to to the market to SELL 50 contracts, and has sold them @ the price the market maker was BIDDING for them.
___________
If it helps, think about the terminology to "lift the offer" or to "hit the bid"...
"Lifting the offer" means coming to the market and buying immediately at the best available price, the lowest price the market makers are OFFERING the contracts for... buying like this is an increase in demand, and if done in enough size, will reduce the supply of offers enough to move the market up a tick or two. Thus buying at the offer "lifts" the prices up a bit.
On the other hand, "hitting the bid" is coming to the market and SELLING at the best price
immediately available, the price that the market makers are BIDDING for them. Selling at the bid will reduce the remaining, and with the increase in supply, "hit" prices down a tick or two.
You might ask "why do people come straight to the market and buy at a higher price than they need to?" - Bear in mind futures are used for a whole host of reasons; A trader on a Hedge fund desk doesnt really care about a single tick or two, he is making a big play; BIDDING for contracts to buy instead of LIFTING THE OFFER gives him little change of getting filled in his order. Other traders are using futures to hedge some other trade, so what is important for them is that they GET FILLED, not so much about the price (additionally, any trades that are HEDGES are quite possibly intended to LOSE MONEY... )
If you're going to be using T&S and the DOM to trade futures, you should get an idea about dealing with size. "SIZE" refers to any bid or offer at any level in the DOM that is unusually large... it is usually one of the following:
1) Spoofing
This is an important think to look out for: if you see a particularly large bid or offer sitting in the DOM, and prices move towards it, watch what hapens to the order as the market starts to approach it. If the bid or offer immediately dissappears, its known as a "Spoof" - whoever had placed the bid did not genuinely mean to deal at the prices he was quoting, he only meant the market to
believe that he did... it works like this:
I put a big offer in to sell and 4 or 5 levels above the best price in the market. I don't really want to sell the contracts, I just want to give the
impression that there is supply at this level, which should act as resistance to prices moving further up. Other, usually less experienced traders, seeing this order, make the assumption that the order is genuine. To profit from it, they try to "step in front" of my offer, by offering to sell contracts at one tick lower. Their intention is to "step in front" of the queue, sell contracts to the market, and "lean on my size"- that is, they think that my offer will soak up all the demand to buy, act as resistance, and prices will tick down - they are "leaning" on my offer to push prices down. Once filled, they then place bids in below the price they offered at, and scalp a tick or two...
However: little do they know it is all a big con: as the price moves towards my offer, I discretely start BUYING contracts, at a mixture of the Bid and Offer. I accumulate a LONG position in the market, and start to add offers to sell ABOVE my "spoof"... if all has gone to plan, I should have bought some contracts from other traders who are trying to "lean on size" that I put in the market; they are now short, based on the assumption that some supply is coming and prices will tick down....
So, I pull it. I take my offer away from the market, leaving a shortage of supply. These traders, seeing that the order has disappeared, think "Oh sh!t; I'm short in a market that is going UP! BUY!! BUY!! BUY!! They look to close their positions quickly, buy BUYING contracts back at the offer price; if there are enough traders "spoofed", in addition to the regular flow of incoming orders, the additional buying should soak up all the offers to sell and "lift" prices...
...If I'm clever, I might have put my Spoof in a place where I think traders will be looking to sell anyway, and, seeing my offer of size, think "well, if prices
trade through that offer, there must be alot of buying, so prices are probably going up, which means I'm wrong to be short, so I'll put my stop loss one tick behind it" - therefore, as I pull my Spoof, the subsequent buying takes prices over and above this "stop price", which triggers
even more buying when the existing shorts look to cover their positions, adding to the upward pressure, and giving me a higher price to sell back all the contracts I am LONG with from sneakily buying them before I pulled my "spoof" :cheesy:
2) Genuine
If an order is genuine, and has been place by, say, a Bank for one if it's customers, the same offer isn't going to get pulled. So, as we get closer to the offer (in this case), we look to see if the order stays there when people start to lift it... the basic idea is that, if all of the sizeable offer is soaked up by market demand, one of two things can happen -
i - the demand for buying at the offer falls away. There aren't enough buyers coming into the market to soak up all the supply of the big offer, so it acts as resistance to prices moving higher - this is what the less experienced traders were expecting to happen in the "spoofing" example. With buyers at the current offer running out, market makers looking to OFFER contracts do so at a tick lower, in front of the genuine size offer, and prices move down (resistance in action).
ii - the demand doesn't fall away, there is enough demand to soak up all of the OFFERS @ SIZE... With all of the previous offers of supply exhausted, the thing to watch is any NEW offers coming into the market - additional offers will serve as further resistance to price ticking up; if they continue to turn up, eventually all of the demand will have been met, so the market starts to tick down again as demand falls away....
... However, the far more interesting scenario is when additional offers DONT appear in the DOM and BUYS still trickle through the T&S; imagine birthday cake at a kids party, split up into one 3/4 piece and 4 1/16 pieces. The OFFER @ SIZE is akin to the big piece of cake... once someone has eaten it all, and no more cake turns up, the remaining - hungry - kids will start to fight hand over fist for one of the few remaining slices; this can happen if prices "trade through size"... all of a sudden there are very little OFFERS of SUPPLY, and still there is a demand from buyers coming to the market. In this case, price can tick upwards one or two ticks as all the buyers sacrifice a tick for "a piece of the cake".
In addition to this, there are also "flippers" who quickly take OFFERS @ SIZE away and replace them with BIDS @ SIZE with the intention of "shaking out" alot of smaller players...and "stop hunting" where traders will continue to buy or sell contracts through a price which, they believe, if traded at will trigger further buys or sells into the market, and they join along for the ride.
The definition and descriptions of the phenomena I have descrbed here may differ from trader to trader, but the basics are all there. Having said all that, it is one thing to understand how they work on paper, another
far far trickier thing to see it in action.
Hope some of the above is helpful.
