Good morning,
Rather conveniently, answering this question also answers the question of "Why can most people always be able to trade in financial markets?" - selling shares is not the same as selling your house, which can take forever depending on what price you're asking for it.
In effect, the job of market makers is to provide liquidity (the ability to buy and sell) and you'll find them in basically every market (currencies and bonds, etc). The big point about the stock market though is that the exchanges want to encourage as much trading as possible and thus want a market continuously running.
Generally speaking large banks and one or two hefty brokerage firms will have teams who act as market makers (primary traders).
Now, market makers make money though the bid/offer spreads, with larger spreads meaning more profit for the market maker. Incidentally, stocks that have more market makers in a particular stock will usually have smaller spreads and market makers are technically obliged to give two-way prices at all times:
e.g.
Bid = 10p
Offer/Ask =12p
Spread = 2p or 20%
Bid: This is the price you sell at to the market maker (the price they buy from you at).
Offer/Ask: This is the price you buy at from the market maker (the price they sell to you at).
If you get confused as to which price you buy and sell at, remember that the market maker's job is to screw you over for as much money as possible, which should remind you that you buy shares at the offer/ask (the higher price) and sell at the bid (the lower price).
Most market making in terms of daily volume on exchanges is actually done by electronic market makers, which are then overseen by primary traders, like the SETS system that runs on the London Stock Exchange and is effectively an electronic order book for the share you want to trade in.
This has a rather cool link to high frequency trading (HFT), because automatic market makers exist within the HTF market to try and get the highest price available from someone looking to buy shares:
e.g. I want to buy 1000 shares in BP at 440p.
Now, I could show my hand and just put that into the electronic order book, or I could get an algorithm to split that order up into groups of 100 shares, with a cap to not buy at a price above 440p.
In the next step, the Automatic Market Maker starts to realise that these 100 share buy orders are coming in and try to take advantage of this, so it starts to ping out orders in descending ask prices and then immediately cancel them until something comes back positive.
When the order hits the 440p mark the Automatic Market Maker will come back with an ask price that's been accepted. Then the Automatic Market Maker will go out and buy as many shares as possible, so to then sell these to me at 440p per share. Trying to buy shares, I can't then go anywhere else because the Automatic Market Maker has pulled all the shares towards itself within that price range, leaving me to purchase at 440p per share.
Thereby, the Automatic Market mMaker can manipulate the price of certain stocks to the upper range of an algorithms price strategy.
Have a great day,
The Masked Stock Trader
Showing posts with label SETS. Show all posts
Showing posts with label SETS. Show all posts
Tuesday, 4 November 2014
Tuesday, 17 June 2014
Catching the Bounce
Good morning,
Today I'm going to discuss "catching the falling knife" or trading price reversals after a sharp down trend.
Our case study will be Quindell plc - a great company in my opinion - which was hit both by a shorting attack and by a listing issue ironically caused by them growing too fast.
1. The chart:
https://www.google.co.uk/finance?chdnp=1&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1400772600000&chddm=61320&chddi=86400&chls=CandleStick&q=LON%3AQPP&ntsp=1&fct=big&ei=97J9U-iEAbOBwAPzsIHYBQ
2. Look at the daily chart:
- We're going to start by looking at the daily chart, which is the easiest way to see the full picture of what happened to Quindell.
- The key date to observe is April 22nd.
3. Trading April 22nd:
- People who specialise in trading reversals will almost always look for two things:
- an intra-daily heavily oversold point to make an entry at.
- a case where it's clear that fundamentals have not been changed.
- These two factors were both true in the reversal on April 22nd and the most effective way to trade this situation would have been something like this:
- Acknowledge the price is falling.
- Look at the likely stop loss levels (a sharp sell off will trigger these and cause further price falls).
- Base your entry point slightly above where a level of strong support exists (in this case around 18.25/18.50p).
4. The reasoning behind this style of trading:
- Acknowledging that the price is falling seems obvious when catching the falling knife, but on AIM in particular shares traded on SETSsq will be subject to market maker manipulation, which can cause these stocks to fake a price fall to the downside. Therefore, I strongly recommend only trading reversals where you know that the stock is traded on SETS (electronic share matching) and not SETSsq (market maker matched trading and exchange).
- Stop loss levels are incredibly important to watch, because we can use them to our advantage when we make a position in the market. If we can see a lot of stop losses on the order book placed within a tight range of each other then it's very likely that a warp price drop will activate these and cause further price drops. This means that knowing the depth of the L2 order book is very helpful when trading these intra-daily.
- Setting your limit buy or market order slightly above the strong support on the chart is essential to ensure that you're actually able to make an entry into the stock. It's inevitable that a lot of people will have orders placed on the support line to buy, but that many of those will not be triggered when the hits the support level, due to excess demand at that point causing the share price to regain upwards momentum. By having your entry set at 0.25/0.50p above this level you are hedging against not being able to make an entry at the support line and then having to pay a premium when the demand at the strong support causes the price to rise again.
5. Knowing when to hold:
- For the guys trading only intra-daily this point will matter less, but for those who tend to hold positions for a few days this is a really handy point:
- Look for the forming bull flag (April 23rd).
- The day after the initial price fall you will likely experience extreme volatility in the share price, but a bull flag will begin to form if the range of the share price holds above the low range of the previous day. This would be a strong indicator to hold your shares.
I hope that all of this text wasn't a turn off,
The Masked AIM Trader.
Today I'm going to discuss "catching the falling knife" or trading price reversals after a sharp down trend.
Our case study will be Quindell plc - a great company in my opinion - which was hit both by a shorting attack and by a listing issue ironically caused by them growing too fast.
1. The chart:
https://www.google.co.uk/finance?chdnp=1&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1400772600000&chddm=61320&chddi=86400&chls=CandleStick&q=LON%3AQPP&ntsp=1&fct=big&ei=97J9U-iEAbOBwAPzsIHYBQ
2. Look at the daily chart:
- We're going to start by looking at the daily chart, which is the easiest way to see the full picture of what happened to Quindell.
- The key date to observe is April 22nd.
3. Trading April 22nd:
- People who specialise in trading reversals will almost always look for two things:
- an intra-daily heavily oversold point to make an entry at.
- a case where it's clear that fundamentals have not been changed.
- These two factors were both true in the reversal on April 22nd and the most effective way to trade this situation would have been something like this:
- Acknowledge the price is falling.
- Look at the likely stop loss levels (a sharp sell off will trigger these and cause further price falls).
- Base your entry point slightly above where a level of strong support exists (in this case around 18.25/18.50p).
4. The reasoning behind this style of trading:
- Acknowledging that the price is falling seems obvious when catching the falling knife, but on AIM in particular shares traded on SETSsq will be subject to market maker manipulation, which can cause these stocks to fake a price fall to the downside. Therefore, I strongly recommend only trading reversals where you know that the stock is traded on SETS (electronic share matching) and not SETSsq (market maker matched trading and exchange).
- Stop loss levels are incredibly important to watch, because we can use them to our advantage when we make a position in the market. If we can see a lot of stop losses on the order book placed within a tight range of each other then it's very likely that a warp price drop will activate these and cause further price drops. This means that knowing the depth of the L2 order book is very helpful when trading these intra-daily.
- Setting your limit buy or market order slightly above the strong support on the chart is essential to ensure that you're actually able to make an entry into the stock. It's inevitable that a lot of people will have orders placed on the support line to buy, but that many of those will not be triggered when the hits the support level, due to excess demand at that point causing the share price to regain upwards momentum. By having your entry set at 0.25/0.50p above this level you are hedging against not being able to make an entry at the support line and then having to pay a premium when the demand at the strong support causes the price to rise again.
5. Knowing when to hold:
- For the guys trading only intra-daily this point will matter less, but for those who tend to hold positions for a few days this is a really handy point:
- Look for the forming bull flag (April 23rd).
- The day after the initial price fall you will likely experience extreme volatility in the share price, but a bull flag will begin to form if the range of the share price holds above the low range of the previous day. This would be a strong indicator to hold your shares.
I hope that all of this text wasn't a turn off,
The Masked AIM Trader.
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