Can MM's buy above their shown bid?

[shaeffer]

If the inside bid/ask is 30.3 and 30.4 and an MM is showing in Level 2 a bid at say 29.8, can he buy above 29.8? Could this MM simply hit the offer price of 30.4, or use SIZE to bid at 30.35?

I guess that .01 can mean a lot to an MM with their order sizes. But just because he (she?) doesn't appear close to the inside bid, does that mean he's not buying?

[michaelm]

ah...welcome to the wonderful world of market making, shaeffer.
yes, MMs can, and do, take offers or hit bids, as well as change size. They are required to show only "part of their hand", and refresh their showing every few minutes.
Figuring out what they're really "holding" is an entirely different game, and by no means an easy task, nor can it be really ever determined. For instance, MMs will show B/A and size, but they may be buying or selling through other avenues, like instinet.

I don't know if you've checked this out before, but I'd recommend The Electronic Day Trader by Friedfertig and West. It may help answer some of your questions.

[shaeffer]

Michael, thanks for the response. What a coincidence, I just bought the book you mentioned, but haven't had a chance to read it yet.

From what I've read elsewhere, I know that MM's only need to show a fraction of what they want to buy or sell, and that they can refresh instantly so that the small amount shown can get bought many times over.

And I know they can buy through instinet, or SIZE (and directly with each other I think via Level 3?)

But what I see so often lately is that there is apparent large selling pressure, say at 30.4, with none of the big boys near the inside bid, yet this gets taken out. So if say MSCO was showing a bid well below the inside bid, say 29.8, he can still take whoevers offer at 30.4, right? He wouldn't even have to do it via SIZE or instinet, becuase he would never even appear in L2, if he took an offer showing by someone else? So really, he could buy all day and never appear at the inside bid?

I suppose that this apparent selling pressure could disappear also by sellers simply cancelling their offers.

Its frustrating. I'll see price dropping to a support level on the charts, and can see significant buying interest around that level in L2, but boom, price drops right thru that level. I know that's why stops are important. I've heard MM's will sacrifice some shares to force a false breakout or breakdown, to start some momentum so they can take opposite positions. Given that, and also that the # of shares shown in L2 is often a fraction of the volume seen on a 1 minute chart, I'm seriously questioning whether keeping an eye on the charts is better than looking at L2.

Maybe the book you mentioned will help. Are you a firm believer in using L2?

Thanks again

[michaelm]

i'm a firm believer in anyone gaining as much information as necessary to feel comfortable enough to trade.
Your example is a little confusing because of your terminology (MMs showing Bid below best bid, MM possibly taking Offer at 30.4, selling pressure pushing through support), but I sense your frustration. Level 2 can help in both seeing what IS shown, and seeing what IS NOT shown to paint a picture of what may be happening.

I've traded both listed and OTC stocks. Each has their own pros and cons. I really disliked trading listed stocks (NYSE and AMEX particularly), until the advent of AutoEx which gave me a potential chance of bailing out when I needed to. OTC trading had more avenues of entering and exiting (e.g., Island, Brut, Instinet, etc), particularly with Island, where you can place hidden bids or offers and immediate fills.

Bottom line, Shaeffer, is that each stock is like a new card table with unique "dealers". The listed "dealers" had their own "personalities" on how they'd handle orders. It takes time to become familiar with each "dealer". Same is true with MMs in OTC. There are services (fee, of course) out there, like Bloomberg, that are able to keep track of which MMs are buying and selling and how much intraday.
You may also want to consider other info, if you don't already, to assist in reading the dealer's hand, like VWAP, watching Time and Sales, watching Trades on Bid vs. Trades on Ask, and the front month option volume, as Options MMs buy and sell TONS of stock in actively traded options.

All in all, learn all you can, and distill that information and incorporate it into a trading plan/system that is simple and comfortable enough for you. Maybe for you that is just watching the charts and time & sales, or maybe more.

Good luck. I think you'll find the book helpful.

[shaeffer]

Thanks Michael, some good info in your reply. I haven't looked at listed stocks for a long time, with the understanding that with Specialists, the market is not 100% equal opportunity. Conversely, though MM's do have their tricks, with direct access and first in gets first priority programming, I think Nasdaq trading is equal opportunity? I trade thru Interactive Brokers, I guess the AutoEx you mention is IB's BEST order. I'll look into that

I think I made my previous question too confusing. I was trying to understand the obligations and restrictions an MM has when he has posted a bid (in L2).

I think the obligation is easy: he must honor that bid if the market moves down to it, and I think 99% of the time MM's do honor their posted bids, even if the market has turned. I guess there must be some price level below the market where his posted bid can be lowered or withdrawn completely, without it being considered backing out.

But it is more his restrictions I was questioning. Let's say the current market is at 44.6 bid and 44.7 offer, and that an MM has a bid posted at 44.1. Is he restricted from buying at a higher price, while his bid of 44.1 is showing? I know he can simply up his bid whenever he wants, but while his bid of 44.1 is showing, could he also (at the same time) be bidding via INCA or SIZE at 44.5? Or, while his bid of 44.1 is showing, could he be actively buying by taking any offer at 44.7?

I just often wondered if, just because I can see an MM at 6 or 7 price levels below the market, does that necessarily mean he is simply waiting/hoping for the market to drop to his bid, or could he still be buying (invisibly in L2) at the current prices, and his visible bid is really just for show.

Thanks again - I'll move that book to the top of my list.

[gspiker]

Hi,

But it is more his restrictions I was questioning. Let's say the current market is at 44.6 bid and 44.7 offer, and that an MM has a bid posted at 44.1. Is he restricted from buying at a higher price, while his bid of 44.1 is showing? I know he can simply up his bid whenever he wants, but while his bid of 44.1 is showing, could he also (at the same time) be bidding via INCA or SIZE at 44.5? Or, while his bid of 44.1 is showing, could he be actively buying by taking any offer at 44.7?

Of course he can. In fact they will often throw up a huge ask hoping to scare out the day traders so they can purcahse via an ECN (often by refreshing smaller sized bids, and stepping down the bid at times) at cheaper prices. They do the opposite to sell at higher prices...it is not uncommon at all.

G

[shaeffer]

Hi Garth,

In my example, the MM was ultimately wanting to buy shares. So your answer was confirming that the MM can post a bid well below the market (to appear not so motivated to buy), but can still invisibly buy all he wants, either passively by bidding above his shown bid through an ECN, or actively by hitting the offer. I suppose the extent that the MM could do his buying by refreshing smaller bid sizes and stepping down the bid thru an ECN, would depend on how many other MM's were also using the same ECN. He couldn't do this very much if other MM's were also using the same ECN to buy?

Then a 2nd strategy the MM might use is to post a high ask size thru an ECN, to scare off any other buyers. But unlike an MM's posted offer in his own name which he must honor, an offer placed via an ECN can be cancelled at the last second - is that correct?. So, if one sees a high ask size that the market then moves right thru without any large block trades or volume spikes, a trader knows this was a fake, and someone has a large buying interest. Did I understand your answer correctly?

So the experienced L2 user would sit back a minute to see if the high ask size acted as resistance, and if it didn't, that would actually be a bullish signal?

Hey, at this rate, I won't need to read the book - I'll get all the answers from you guys! Your insights are much appreciated.

[gspiker]

shaeffer,

Then a 2nd strategy the MM might use is to post a high ask size thru an ECN, to scare off any other buyers. But unlike an MM's posted offer in his own name which he must honor, an offer placed via an ECN can be cancelled at the last second - is that correct?.

Yes.

So, if one sees a high ask size that the market then moves right thru without any large block trades or volume spikes, a trader knows this was a fake, and someone has a large buying interest. Did I understand your answer correctly?

What I do is look at LVLII and TOS. TOS will show you if someone is refreshing or pulling their bids. This is pretty common to use LVLII and TOS together. It give syou a clearer view of what is going on.

I suppose the extent that the MM could do his buying by refreshing smaller bid sizes and stepping down the bid thru an ECN, would depend on how many other MM's were also using the same ECN.

While it is possible that two or moe MM's may be working big orders for customers, in fact it doesn't seem to happen all that often. Typically one MM is the AXE for a stock...and handles much of the order flow on that day. There just aren't many MM's that can really make the market in more than one or two stocks (at least larger cap stocks) at a time...and those that can are well known to LVLII traders.

I would still recommend reading up on the subject. There are MANY, MANY games that MM's can (and do) play.

G

[michaelm]

Shaeffer,

Garth is correct.

As you are becoming more aware and knowledgeable of the various methods MMs use to trade and work orders, there is always the last "card", for me, which has turned me off to trading stock. There is always someone (a MM, or a large customer, company, etc) out there who has more information on that particular stock than I do. It was quite frustrating trading a stock profitably, only to have it eroded in a moment.

In other words, individual stock movements are susceptible to news/information that I'm not privy to until the movement has already occurred. That is the reason I lean toward index trading, particularly futures trading, and not until a time of day when I feel much of that information has worked its way into the market.

I do not intend to discourage anyone from trading whatever they choose...I am just adding my .02cents.

[gspiker]

michaelm,

In other words, individual stock movements are susceptible to news/information that I'm not privy to until the movement has already occurred.

Which is why you can really only use LVLII to scalp (or fine tune entries off of other factors). In theory, news is built into the price and volume pattern of charts (assuming someone knows about the news in advance). So if you use price and volume patterns to enter a trade, aside from news that caught everyone flat footed, you should be able to trade in the direction of the news.

However, this assumes a fairly liquid stock, where it is harder for the big guys to play "fake out" games. Not impossible - but harder. So, once you go to indexes, that adds even more accuracy to the signals from price and volume patterns (as one or two institutions will have a much harder time faking a move on them).

I also have moved from stocks to more index trading for the reason above, and an even more powerful reason. I'm lazy. given that 90% of the stocks move in the direction of the main trend of the markets and their sector trends - that means a good swing trader has to do analysis on the market indexes, and sector indexes. And then look at the individual stocks to see which seem best placed to follow the trend. On the other hand, if I just do the major or sector index analysis I can trade those and my research is done. It also means you don't get caught buying the one stock that doesn't move with the index trend.

I still trade stocks...esp when I see exceptional set ups in the market. But I trades futures, index and sector options and EFT's much more often in the past 5 years (well futures are a new addition...and one which I'm having great fun with).

Garth

[shaeffer]

Hi Garth,

I do watch T&S together with L2, but until your message, I only had 'Sales' turned on in T&S. My understanding was that, despite what games MM's might play in the L2 view (buying thru ECN's or posting false bids/asks), the proof was in the Sales.

But I've learned that even seeing Sales isn't fool proof. I've been scared out of a short position when a stock has spiked up out of a consolidation or other chart pattern, only to see the stock turn around and have a major sell-off. An MM trick, I assume. Presumably breakout (Long) traders would have got burned in that case too. The only way around getting trapped by a false breakout, I guess, is to hold the position a little longer (at the risk of a little more loss).

So, I only watched Sales in T&S, until your message, after which I turned quotes on too. After a half day watching this, I can't say I could see the difference between new quotes and refreshed quotes (in a fast stock like KLAC), but I could sense swings in buying and selling pressure, just from the colors. You turned a light bulb on for me there - thanks.

Your comment about one MM typically working a stock, on a particular day, was an eye opener. Via the NasdaqTrader site, I note who the top 5 MM's in a stock are. Their monthly % activity in that stock is not so very different, so I assumed they were all more or less equally active each day. Though I recognize the key MM's in L2, I can't say I've clearly known who the AXE was. I thought TotalView would help with that, but they all hide behind SIZE.

Speaking of TotalView, I subscribed, starting last Monday. I think Nasdaq claims about seeing the same liquidity as MM's is misleading. In TotalView, you can see the liquidity from multiple MM orders, but you can't see the liquidity of non-supermontage members (most ECN's, I think). And that liquidity can be significant. Then in PowerView, you can see ECN liquidity, but not multiple MM order liquidity. I was hoping that the PowerView depth meter would include that multiple order liquidity, but I don't think so - I'm waiting for eSignal to respond to another posting about that. I'm not sure yet how much improved value (if any) is brought by the new L2 views.

Hmmm, I suppose TotalView, since excluding most ECN's, would give a market liquidity picture that would exclude MM game influence, so that has value. But not seeing ECN activity is too big a blind spot, I think.

There's gotta be a thread titled "Games MM's Play, and how to counter them", somewhere, I'll look for it.

Thanks again
Shaeffer

[shaeffer]

Hello Garth, Michael,

I haven't looked yet at trading futures and options. My understanding is that they can be much more volatile and leveraged, so if one can't trades stocks with consistent profit, one shouldn't consider futures and options. Agreed? (Hmm, I guess that confesses how well my stock trading is going).

Doesn't news, even from key large cap stocks, affect futures and options as much, Michael (though likely not as much affect as on the stock itself)? At least technical analyses and stops (vs fundamental analyses) gets a trader out of the stock with limited damage after bad news. I tend to agree with Garth, that chart analysis, in theory, should give a person an early warning to news known to insiders (e.g. Don Worden of TC2000 'warned' of GE last Wed night, based on tech analysis)

[gspiker]

I haven't looked yet at trading futures and options. My understanding is that they can be much more volatile and leveraged, so if one can't trades stocks with consistent profit, one shouldn't consider futures and options. Agreed? (Hmm, I guess that confesses how well my stock trading is going).

Yes. Don't play with options or futures until you really are good at trading and have worked the kinks out of your system and psychology.

G

[michaelm]

Shaeffer,

Doesn't news, even from key large cap stocks, affect futures and options as much, Michael (though likely not as much affect as on the stock itself)?

Yes, which is why I don't start trading until after 8/8:30 PST. Most info is incorporated by that time, particularly economic numbers/news.



Garth,

So if you use price and volume patterns to enter a trade, aside from news that caught everyone flat footed, you should be able to trade in the direction of the news.

True, but I'd much rather trade it on a much longer time frame than intraday, hence the intraday frustration...scalping and chart trading successfully only to have ONE trade whack a percentage of profit for that day. Yes, losses occurr in trading, but some losses I can take much better than others. I'd like to eliminate more of those chance unkowns in trading, which is why I prefer index trading.