Joe Ross
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THE COST OF STOP RUNNING IN THE FTSE 100
(by Joe Ross)
The nemesis of most traders is that of stop running. Stop running is rampant on the 60-minute FTSE 100 chart.
What is "stop running," and what should you know about it?
There are two points of view with regard to the action called “stop running:”
1. The point of view of the market makers (we’ll call them sharks).
2. The point of view of the small fish on which the sharks dine.
Who are the sharks and who are the small fish?
If you are an individual trader, as I am, chances are you are one of the small fish. What happens to us is something we call “stop running,” or “stop fishing.”
If you are one of the sharks, a market maker or market mover who has sufficient power to move prices, your name for the activity the small fish call “stop running” is “order filling.”
I don’t want to belabor the point of identifying exactly who the sharks are, or to delineate exactly at which point a small fish grows and becomes a shark. Suffice it to say the sharks are the ones who do the stop running, or is it order filling?—it really depends on your point of view.
The basic purpose of a market is that of filling orders. It is a place in which you can buy or sell. If the buying and selling is easily done, the market is said to be “liquid.” The sharks are those who make it their business to see to it that all orders within reason are filled. They want the market to be liquid—it makes it easier to find a meal. In that sense, whether officially or unofficially, they behave as market makers. It is to their benefit to see to it that as many orders as possible are filled.
We can look at it this way: the more the market makers are able to fill orders, the more there is liquidity, and the sharks love to swim around in the liquid seeing how many orders they can snap up. From their point of view, that is their designated role—that of filling orders. When your order is in the market, it becomes potential food for the sharks.
If you place your order in the market within reasonable reach of the sharks, they are going to eat…uh…fill that order.
They have no idea of whether or not the orders they see are entry or exit orders. They do not know that this particular order is your protective stop. They do not know if your protective order is too great relative to what you really can afford to risk. They don’t know if your protective order is too close so that your risk it too small. All they know is that there is an order in the market and that order can provide at least a snack for their gigantic appetites.
From their point of view, if you don’t want them to fill your orders, don’t put them in the market!
Aha! So now you think you will be clever and leave yourself with only a mental protective order—a protective stop. But that is not the answer, and here’s why:
Small fish generally gather in schools—a whole bunch of them all in one place. When enough of the small fish are in one place, the shark begins to feel hungry. He sees all those fish gathered in one place and says to himself, “Now I can have feast.” The next thing you know, he is moving towards the orders of the small fish. He gobbles them up and starts looking around for his next meal. His next meal is usually in the opposite direction from which he just came.
With that in mind, let’s see how often the sharks catch the small fish.
Let me now define what I see as stop running on the 60-minute FTSE 100 chart.
Stop running, as I see it, is the taking out of (a violation of) the previous bar’s high or low by 10 minimum tick fluctuations (£50) or less.
If you look at a 60-minute chart of the FTSE 100, you will see that this is a very common occurrence. I’m going to put an arrow by each of the 10 tick incidences of stop running. Anything less than that should become obvious just by looking. I dated the chart in case you are able to view it at the time you read this article.
In all, there were 32 incidences of stop running as previously defined. There are 105 60-minute price bars showing on the chart. That means that on 30.5% of the hourly bars (105/32) the market movers were clearly engaged in stop running. The stops they were able to devour were all done by filling orders 5 minimum tick fluctuations above or below the high or low of the previous hourly price bar.
During that same period of time, the sharks gobbled up 83.5 minimum price fluctuations multiplied by the number of contracts involved.
Of course we cannot possibly tell how many contracts they devoured since we do cannot easily ascertain how much of the 60-minute volume was devoted to their feast. But we can make a very rough assumption.
We know that on 30.5% of the bars there was definitely stop running. The average volume during this time period was 5,000 contracts per hour. Can we safely guess that 10% of those contracts were eaten up by stop running? I’m sure my math is flawed, but I am having some fun here. Truly I believe that greater than 10% would be a more accurate figure. I will no doubt hear from the mathematicians and theorists on this.
Based on my assumption, and with full realization that the word “assume” makes an ‘ass’ out of ‘u’ and ‘me,’ I submit that stop running alone put at least 500 contracts per hour into the pockets of the market movers. This took place on 32 occasions. Those 32 occasions resulted in a total of 83.5 ticks being gobbled up. If we multiply 500 contracts x 83.5 ticks, we come up with 41,750 ticks. Multiply that by £5 and we get an extremely conservative figure of £208,750. We see that stop running by the nice market makers striving to give you your fill, was worth at least £208,750 in extra spending money for them. In reality, I am certain in my own mind that it was considerably more than that—but not bad earnings for only 10 days’ work.
(by Joe Ross)
The nemesis of most traders is that of stop running. Stop running is rampant on the 60-minute FTSE 100 chart.
What is "stop running," and what should you know about it?
There are two points of view with regard to the action called “stop running:”
1. The point of view of the market makers (we’ll call them sharks).
2. The point of view of the small fish on which the sharks dine.
Who are the sharks and who are the small fish?
If you are an individual trader, as I am, chances are you are one of the small fish. What happens to us is something we call “stop running,” or “stop fishing.”
If you are one of the sharks, a market maker or market mover who has sufficient power to move prices, your name for the activity the small fish call “stop running” is “order filling.”
I don’t want to belabor the point of identifying exactly who the sharks are, or to delineate exactly at which point a small fish grows and becomes a shark. Suffice it to say the sharks are the ones who do the stop running, or is it order filling?—it really depends on your point of view.
The basic purpose of a market is that of filling orders. It is a place in which you can buy or sell. If the buying and selling is easily done, the market is said to be “liquid.” The sharks are those who make it their business to see to it that all orders within reason are filled. They want the market to be liquid—it makes it easier to find a meal. In that sense, whether officially or unofficially, they behave as market makers. It is to their benefit to see to it that as many orders as possible are filled.
We can look at it this way: the more the market makers are able to fill orders, the more there is liquidity, and the sharks love to swim around in the liquid seeing how many orders they can snap up. From their point of view, that is their designated role—that of filling orders. When your order is in the market, it becomes potential food for the sharks.
If you place your order in the market within reasonable reach of the sharks, they are going to eat…uh…fill that order.
They have no idea of whether or not the orders they see are entry or exit orders. They do not know that this particular order is your protective stop. They do not know if your protective order is too great relative to what you really can afford to risk. They don’t know if your protective order is too close so that your risk it too small. All they know is that there is an order in the market and that order can provide at least a snack for their gigantic appetites.
From their point of view, if you don’t want them to fill your orders, don’t put them in the market!
Aha! So now you think you will be clever and leave yourself with only a mental protective order—a protective stop. But that is not the answer, and here’s why:
Small fish generally gather in schools—a whole bunch of them all in one place. When enough of the small fish are in one place, the shark begins to feel hungry. He sees all those fish gathered in one place and says to himself, “Now I can have feast.” The next thing you know, he is moving towards the orders of the small fish. He gobbles them up and starts looking around for his next meal. His next meal is usually in the opposite direction from which he just came.
With that in mind, let’s see how often the sharks catch the small fish.
Let me now define what I see as stop running on the 60-minute FTSE 100 chart.
Stop running, as I see it, is the taking out of (a violation of) the previous bar’s high or low by 10 minimum tick fluctuations (£50) or less.
If you look at a 60-minute chart of the FTSE 100, you will see that this is a very common occurrence. I’m going to put an arrow by each of the 10 tick incidences of stop running. Anything less than that should become obvious just by looking. I dated the chart in case you are able to view it at the time you read this article.
In all, there were 32 incidences of stop running as previously defined. There are 105 60-minute price bars showing on the chart. That means that on 30.5% of the hourly bars (105/32) the market movers were clearly engaged in stop running. The stops they were able to devour were all done by filling orders 5 minimum tick fluctuations above or below the high or low of the previous hourly price bar.
During that same period of time, the sharks gobbled up 83.5 minimum price fluctuations multiplied by the number of contracts involved.
Of course we cannot possibly tell how many contracts they devoured since we do cannot easily ascertain how much of the 60-minute volume was devoted to their feast. But we can make a very rough assumption.
We know that on 30.5% of the bars there was definitely stop running. The average volume during this time period was 5,000 contracts per hour. Can we safely guess that 10% of those contracts were eaten up by stop running? I’m sure my math is flawed, but I am having some fun here. Truly I believe that greater than 10% would be a more accurate figure. I will no doubt hear from the mathematicians and theorists on this.
Based on my assumption, and with full realization that the word “assume” makes an ‘ass’ out of ‘u’ and ‘me,’ I submit that stop running alone put at least 500 contracts per hour into the pockets of the market movers. This took place on 32 occasions. Those 32 occasions resulted in a total of 83.5 ticks being gobbled up. If we multiply 500 contracts x 83.5 ticks, we come up with 41,750 ticks. Multiply that by £5 and we get an extremely conservative figure of £208,750. We see that stop running by the nice market makers striving to give you your fill, was worth at least £208,750 in extra spending money for them. In reality, I am certain in my own mind that it was considerably more than that—but not bad earnings for only 10 days’ work.
