Market Liquidity

[AngryErik]

First post... looks like a great forum, ended up seeing references to it from other websites about trading (mostly in blog comments and the like). After seeing a number of interesting threads, and after a quick search I can't find a definitive answer to my question - perhaps I'm just blind, or perhaps it's not there.

I know there are a thousand pages on the internet (and here) which talk about adding and removing liquidity... I understand in concept that adding liquidity is setting your buy price higher than the current bid, or your sell price lower than the current ask.

But.

With the market makers / HFTs setting their bid/ask a mere 1 cent apart, how would one be able to do this? Placing a bid higher than the current bid, or an ask lower than the current ask, would be the same as a market order as it would be executed immediately.

Would one simply post an order using the same bid/ask price as is already in play (ie if the last order filled was 14.50, bid is 14.49 and ask is 14.50, then I place a buy at 14.49, or alternatively a sell at 14.50)?

 

[Trader333]

In my view you would place your order the same as you have stated as that way you are not at risk of slippage that may happen with a market order.

 

[AngryErik]

Intereting. So, placing at the present ask/bid will add liquidity in your view. Appreciate your answer

 

[Trader333]

Adding liquidity in real terms would depend more on how much size you place at the bid /ask.

 

[rawrschach]

and more on whether you actually want to be filled or not

 

[wino59]

Intereting. So, placing at the present ask/bid will add liquidity in your view. Appreciate your answer

If you a bid and ask within a penny, then it is pretty liquid.... Where you have to watch is when the spreads get further and further apart. Then it becomes less liquid.

Liquid means being able to get in and out with out much trouble of being filled at the price I want, and I determine that based on the spread and volume.

There is always going to be a spread, that is how "the market" makes its money, just like a bookie, he gets the juice whether you win or lose.

Further apart the spread the more the trade will have to work out, because you already start in losing position, and how much you are losing is based on the spread.

 

[AngryErik]

Sorry for the delay in getting back to this one.. hell at work lately, trading had to go on the backburner for a bit

Appreciate the further replies. I guess all I'm really looking for, is getting in on that juice the market maker is getting. Particularly since the broker that I'm looking to swap to (interactive brokers, still on the fence though) does credit those exchange credits to the customer.

Trader333, what did you mean by the sizing? I thought that adding or removing liquidity was exclusively in the price that you bid/ask at?

 

[BobbyBB]

I guess all I'm really looking for, is getting in on that juice the market maker is getting.

That juice is not available to you. MM's have all sorts of advantages over you, me, and 99% of this board.

They are -

More capitalised than you
Deal on possible hidden price to you
have multi-years of experience over you
See much of the order flow, you'll see virtually none
Have faster computers than you, you're pushing a pram, they're driving F1 cars
Have far cheaper costs than you by as much as 99%
Have far cheaper leverage than you, possibly risk free
Have rebates available and so much more

Nobody has ever made a living as a market maker unless they are working for a big market making house or operating as a local down on the floor but there aren't many floors open anymore, perhaps a bit of options.