How do MM's work?

[TheBramble]

I'm not convinced the MMs can move a price AND volume. I work on the basis that price moves without 'appropriate' volume is MM work rather than 'true' market action. I know these boys can play stuff back and forward between themselves, and even WITH themselves, and in and out of back doors, but I've never identified them doing it with any size. If they do play with size, how do you determine what is MM initiated and what is market initiated?

Plus, a spike is only a spike after it's finished. Not trying to be cute, but "unexplainable spikes and play it. Panic sell offs, short squeezes, runaway momentum" are only evident AFTER their formation. Whatever timeframe bar you're looking at, it's only on the close of that bar you know it WAS a spike. If it's the start of a new trend, reversal or continuation after consolidation, you only get to see that AFTER the move has finished for that bar.

If you have any techniques for judging these situation more dynamically, I'd be interested in your methods.

 

[jezza888]

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'.

I'm not convinced the MMs can move a price AND volume. I work on the basis that price moves without 'appropriate' volume is MM work rather than 'true' market action. I know these boys can play stuff back and forward between themselves, and even WITH themselves, and in and out of back doors, but I've never identified them doing it with any size. If they do play with size, how do you determine what is MM initiated and what is market initiated?

Plus, a spike is only a spike after it's finished. Not trying to be cute, but "unexplainable spikes and play it. Panic sell offs, short squeezes, runaway momentum" are only evident AFTER their formation. Whatever timeframe bar you're looking at, it's only on the close of that bar you know it WAS a spike. If it's the start of a new trend, reversal or continuation after consolidation, you only get to see that AFTER the move has finished for that bar.

But....

Market makers don't make decisions on trades they just provide two way quotes.
They are generally obligated to provide a bid and offer at all times and the
only freedom they have is to adjust the quote price and quote size.

They also do not generally move markets it is the other market participants that do that.

Slightly confused now!

If MM's are only providing the bid and offer surely it would be the larger market participants who make the spikes and the volume not the MM's themselves. Are they not just the middle men for the people/institutions who are actually moving the market(s)?

 

[TheBramble]

If MM's are only providing the bid and offer surely it would be the larger market participants who make the spikes and the volume not the MM's themselves. Are they not just the middle men for the people/institutions who are actually moving the market(s)?

Did you check out the url CharlieChan posted?

http://www.stocktrading.com/wsjknight1.shtml

It's your 'If' that needs to be considered. How much of their activity is purely to provide a market - and how much is to profit directly from their privileged view of the market?

As was stated in that article "Nasdaq has been transformed from a market where people [the MMs] make money off spreads to one where people [the MMs] make money off information. When the market was so much more fragmented, it was hard to be right. But when you have 30% of the order flow, you can make some damn good guesses."". {my emphasis}

These guys don't do pro bono.

 

[cgoodwinca]

More observations of a less than fair market

My response is to the last four? posts prior to this.

Regarding spikes (up or down and back to original price area), panic selloffs, momentum runups, on a minute and tic chart with 10 min and daychart in back to affirm the scenario, I can only believe say I've been ripped off so many times for unexplainable reasons, that there must be manipulation and therefore 'intent' to do a particular move with a particular technique based upon the preceding and current price-volume activity. I've gotton caught in a spike a few times....wondering if I should sell....price goes down 30 cents....90 cents, whatever, and back to the price range where it was hanging out preceding the move. So I've asked myself, 'what was that all about', and can only suppose that 'the trading-powers that have knowledge", (i.e. computers which can assess every scenario in a moment based upon the players involved at the current moment) take out positions because they can, and because those types of plays (stop orders) are easy pickings if a mm knows they are there. Panic selloffs have certain types of behaviors, and 90% of the time when there is a larger tic or set of tics, the end is near. Especially if going back on the day chart there is a gap....price tends to cross the gap and pinpoint (i.e. mm technique cuz it aint random) the top of the tic on a daychart which is on the other side of the gap (perhaps a week ago, perhaps months ago).
I am beginning to wonder if a daytrader can be 'marked'. This is a crazy idea, but worth considering since we do live in the computer age. What if every trade you, the daytrader, places, can be identified as coming from 'you' / your account. If this is possible, then 'the system' can track your trading style, identify your success and failures, and if you are identified as a potential 'thorn' for whatever reason, you could eventually be 'marked' to try to get you to sell at a loss, asap, by moving price into your sell zone, if your entry point is during a slow period or fake period. Regarding fake periods on a typical day, I am fully convinced that much of a stocks movement is not because of Joe Daytrader, or the retail sector. The whole concept of 'more buy orders than sell orders", or vis versa, is absolute rot. Look at the message boards on Yahoo, t2w, etc etc for these stocks which have traded hundreds of thousands of shares on any particular day. I've seen some message boards with ONE post, something like, 'what was that all about' for the days price action, and thats it. That tells me, there was NO retail trading in that stock for the most part, yet hundreds of thousands traded for that day. So what does that draw me to conclude if there is no news, no reason to buy or sell this thing other than it's own movement? It's mm's and funds just roaming around because thats their job, buying and selling to oneself, be it 10 shares or 100,000, it's a wash. Bottom line is it is very difficult to interpret what is 'real', based upon ideal setups having gone bad and finding no other explanation other than there is indeed monkey business in the market.

 

[Trader333]

In my view trading is not about what is fair as long as trading is done within the boundaries that are allowed then it is fine by me. In fact I rely on the attempts by others to manipulate markets in order to make a profit myself. In a truly fair market this would be made more difficult


Paul

 

[Directional]

exactly true - trading futures is inherently unfair - for every winner, there is a loser - pretty unfair on the loser but tough tits thats trading

 

[jmreeve]

exactly true - trading futures is inherently unfair - for every winner, there is a loser - pretty unfair on the loser but tough tits thats trading

It's misleading to personalise the market by thinking there is another winning or losing
trader on the other side of your trade.
More often there are many winners for a loser or many losers for a winner and they may
all be trading different strategies for different reasons.

The counter party doesn't even need to be in the same market.
For example, if someone loses money on a FTSE futures contract the counter party
could well be a stat arb program. The stat arb program locks in a profit by selling
a basket of stocks so that ultimately the profit/loss of the futures trade is split between
100 different stocks.

I don't really see why it is unfair, it's just business.

 

[TheBramble]

Even these days, quality of info available to the retail community doesn't stack up at all well against that available to the wholesale traders.

Could you be more specific? Are you talking about speed, accuracy, quantity, quality? Genuine question.

it's interesting to note that fx market makers at large shops

FX MMs? I thought all FX was done through globalised inter-bank network. What's the "Who, Where, How" on FX MMs or if that's too big a question, where can I find out more?

I'm a relative newbie to FX, but I do my research and I've never encountered anything that relates in any way to the MM basis we have on stocks.

This is a genuinely interesting thread.

 

[jezza888]

Ditto all TheBramble just said.

I am interested in all aspects of MM's etc. in regards to trading but the more FX related the better.

Cheers

 

[jmreeve]

Hey there, I feel you must have miss-interpreted this post. Its a tongue in cheek response to a previous posters hints that the market is inherently unfair.

My apologies If this is the case. I didn't read the previous post.

 

[charliechan]

fx is an otc market.

very basics are here...

http://www.investopedia.com/terms/o/over-the-countermarket.asp

as there is no regulation (other than self regulation) it is ok to front run large orders.

the info gj is probably talking about is the info from customers. eg if a customer says 'i wanna buy $10billion', this could help even jonny the graduate make a dime! this is the order flow i mentioned earlier.

also, just being plugged into the city (wall st) can help - eg if your boss takes a member of the mpc committee out to lunch. german economic releases have a bad habit of getting leaked etc. you just dont get info like that out on the 'official' wires retail subscribe to.

 

[charliechan]

whats the job of a mm?

its just to provide liquidity. assuming the risk of doing so and hopefully turning a profit. their goals are the same if its otc or exchange traded

read up on market micro structure could help (google) - will help understand stuff like inventory issues they face.

 

[Directional]

I enjoy being amongst other futures traders. Especially walking behind new grads and giving it a; "oh dear, wouldn't want to be long there if i were you"

LMAO!! :cheesy:

 

[sandpiper]

"FX MMs? I thought all FX was done through globalised inter-bank network. What's the "Who, Where, How" on FX MMs or if that's too big a question, where can I find out more?".

Tony,

Apart from first hand info from GJ, there are a few IB capital markets sites you could have a look at (you may well have done already). Barclays Capital used to have a decent one.

Another one you could have a look at is www.gtnews.com. It's got some semi-interesting stuff on there about white-labelling FX and liquidity outsourcing.

Edit: Another thought. You could have a look at www.e-forex.net on a trial basis. It looks like it's got some articles on 360t and the like. Can't say whether e-forex is any good or not. I have enough of that stuff that I have to wade through already.

 

[TheBramble]

SP - very informative sites. Thanks.

While I thought I was up-to-speed on multi-portal technology, liquidity provision and order flow, the stuff on these sites really does fill in some major gaps - and create new ones!

My background in stocks and commodities and although I thought the FX market was structured quite differently in terms of price provision, is turns out it is, and isn't. Bit of an awakening at a very basic level for me.

Thanks for the pointers.

 

[sandpiper]

Tony,

Glad they were of some use.

 

[dick_dastardly]

Absolutely. Just Price, Volume and Time.

That's not to say the occasional judicious use of a trendline to confirm line-of-sight or LII for micro-management on entry & exit isn't a good thing - it can be.

But everything else on the 'poker-playing' side of market trading is pretty much extraneous.

Take HSBC this morning. Fantastic profits reported, but worst performing customer service bank. Is that good, or bad? What would you have thought before the UK market opened? Well, the market liked it short term. But what about long term? This is nothing to do with MMs. But everything to do with the real question you were asking.

You're on a hiding to nothing looking too deeply into 'market mechanics'. I even used to think that fundamentals led price.

There are games played for sure by those with the clout to play them, but you can see what they're doing. Giants leave footprints. I just love that phrase. If you want to get in ahead of them, be my guest, but it's much safer to tag onto their coattails.

TheBramble, hope this doesn't sound like a daft question but I'm curious as to how you use Time in your trading ?

Fully understand if you don't wish to answer this.

dd

 

[cgoodwinca]

Eyes wide shut

What if:

Investment firms and MM's built a database of you through your trade activities and stratagy by marking your account via your trade platform account identifier and they can climb right up into your computer to see what you might be doing...with kickbacks from your losses going to your 'discount broker'? Your name becomes 'Little Bo Peep' or some such marker everytime you enter a trade and the computer MM knows when your idle, offline, yet in a trade. If you've been idle in a low volume stock and come back to move your mouse....red alert sent to MM that you are a potential threat. This is true modern warfare, and no, it's not fair.

 

[Trader333]

........ If you've been idle in a low volume stock .....

You could try avoiding trading in low volume stocks so that this can be avoided


Paul

 

[cgoodwinca]

Go ahead and ridicule me, but when you believe, you'll see what's happening.

Horseracing has it's way of cheating, Casinoes keep tabs on when certain undesireables enter a casino.

The MM's can see you, as a daytrader, enter a trade. At the very minimum the computer system keeps tabs on your position and can tweek the price during slow periods to put pressure on you. Do you think a computer cant figure out the best stratagy to screw with as many traders as are in a position for a short period? Most days are artificial volume and a game to put pressure on the most traders...computer age, dude, not wild wild west. It's not illegal to keep tabs on
daytraders positions by MM's. They can even build a database of your profile based upon trade platform identifiers so that MM computer algorythms can create a stratagy to f' with the most people based upon their average time in the market. We're talking about Las Vegas here. Casinoes are built upon statistics of how to screw people eventually, and daytrading is the same. You are handing yourself over to a computer system where the average days price movement is all about suckering people into artificial volume-price activity, and unless funds are buying and selling, thats what its all about.
Cheers.