camron.systems.australia section 13 of 30

© 2010 « home « next »

volume - market depth

This section examines volume. How the market behaves in response to supply.
Individual components comprise, the volume of contracts traded, market depth, and supply and demand. Two main characteristics are: Selling volume and Buying volume. Market depth displays only the "sitting" component, whether it be buying or selling. Further characteristics are opening (entry) volume and closing (exit) volume. Volume is the umbilical cord that joins supply and demand together. When participants are enthusiastic, the volume traded will determine price. If unenthusiastic, price will determine volume.

how important is it ?

investopedia states "There is little research on the volume of futures in comparison to that of stocks"

volume	market depth	supply demand
low volume day high volume day	behaviour icebergs dummy bidding stealth trading impairment sweeping	volume = supply = demand theory of supply and demand measuring supply and demand granville's engine - a granville's engine - b

volume = supply = demand

Logic of Individual Choice is the foundation of supply and demand.
Volume is the substrate of practical supply and demand.
Volume is the umbilical cord between supply and demand.
Price is determined at the intersection of supply-volume and demand-volume curves.

volume effect

Once upon a time .. the over-riding 20th century principle was "price" reflects all that is known.
So ask the question .. If that's true, why do institutions spread large orders between three, or more brokers, use iceberg orders, and stealth trading. If it's not important, why hide it. Paradoxically the majors are hiding what the minors aren't even looking at ?. If nobody's looking they won't see the gorilla

daily volume

The volume of contracts traded on any given day will vary.
5,000 or more contracts traded, by 12:00 midday indicates it is likely to be a high volume day.
10,000 or more contracts traded by the close of trading is a high volume day.
3,000 or less contracts traded, by 12:00 midday indicates it is likely to be a low volume day.
6000 contracts or less by the close of trading is a low volume day.

If it is not a NEWS day and the volume traded by 10:00am is less than 500 contracts, the institutions have collectively decided not to trade, and it will likely be a boring day so don't expect too much volatility or range. Unless the insiders come out to play at 1545pm. see ASX after market auction.

Low volume day

Whenever there is a holiday in NSW but not VICTORIA, and vice versa, it will be a light volume day. In this case, if New York was positive then there will be an absence of heavy sellers and the market will tend to go up all day. Holidays are frequently ambush days. BUY, BUY, BUY.

High volume day

A normal heavy volume day will see 10,000 plus contracts trade, by the close with approximately 5,000 contracts traded by 12:00 midday. High Volume days tend to be one directional. Up or Down.
An abnormal heavy volume day occurs with a surge in trading from about 15:30 in the afternoon with up to 30% of total contracts done in the last hour of trading. It is suspected that this represents large orders coming from America in anticipation of a reasonable move in New York over night, with positions to be closed on the open the following day. This behaviour can turn a low volume day into a high volume day.

market depth

understanding market depth

The market-maker is the market-depth.
Understanding market-depth therefore depends on understanding market-making and the tell-tale signs of the market-maker.

market-depth = order-book = dom

market depth is a sub-section of tape-reading

market depth - (a) - behaviour

the illusion of market depth
SFE market depth behaves differently to ASX market depth. Market depth is a schedule of buying and selling, 5 levels either side of the market, the quantity, bid and ask, at each price level. Don't believe it.

Ever placed an order to buy, and been told there are 10 in front on the bid with 50 on the offer?

Under the rules of supply and demand, price eqilibrium occurs when buying and selling are equal.
When buying exceeds selling, price rises. When selling exceeds buying, price falls.
When sellers outweigh buyers, buyers retreat to absorb excess supply. Sales occur on the bid side.
When buyers outweigh sellers, sellers retreat to absorb excess demand. Sales occur on the ask side.
These rules apply when total buying and total selling are visible, known, and quantifiable.

What is seen in the market depth schedule are sitters only. Observe .. when a buy of 20 hits the offer, the quantity offered is (always) reduced by 20. If the buyer was a visible buyer, sitting in the bid queue, now going to market, then 20 would also peel out of the quantity bid. They dont. The visible schedule is a fraction of true buying and selling at any time. Don't expect the market to behave in accordance with the visible depth. It's the tip of the iceberg. That's the industry name for it. For a complete understanding see "iceberg orders". If price is static or rising and buy-sitters peel out, it is because they no longer believe they will get filled. If price is falling and buy-sitters peel out, they are retreating.

Keep in mind commercial traders never show their hand, EVER.
Commercials are hitters not sitters. Sitters are exits. Hitters are entries.
If a large quantity appears on either the bid or the offer, then think about why that is.
It has been placed there for a reason.

One advantage to be gained from market depth and it is not the obvious one. The best explanation found so far, can be seen at www.trading-ideas.com One of the few web articles we came across that provides a common sense insight into the benefits of market depth. Look closely. It's right there, under your nose, and it's not obvious.

a market depth tip - look for the "orphan"

activities influencing market depth
Icebergs, Skyscraper orders
Order splits, Dummy orders
Tease orders, Cancelled orders, Pullouts.
Populate, de-populate, re-populate.
algorithmic trading

Watch a Forex market and see the market-maker continuously populate, de-populate, and re-populate the queue with reconstructed tease orders. (NB: all Forex markets are unregulated). We have recently done work analysing market depth. The front level only. Nearly 20% of orders are cancelled. A higher percentage if you examine lower levels. Until exchanges introduce cancellation fees, to deter manipulation, we are not inclined to rely on market depth. It's impossible to eliminate the market-makers rubbish and get at the reality. While that is only the market maker, it is also typical of the larger "market movers".

related visibility topics
exchange rules prevent large limit orders
supply-demand, market depth, market ambush 3 dots connect.
scaled orders and automatic electronic order replenishment.
iceberg orders
hitters and sitters
illusions

market depth - (b) - dummy bidding

False bidding is a fact of life in an electronic market. A sense of dummy bidding can be obtained by observing the market-maker in an electronic forex market. In the SPI200 20% of posted bids that reach the front of the queue, are withdrawn before they can be hit. That percentage does not include those that are withdrawn from levels 2 through 5 before reaching the front. The exchange holds the view that as long as a bid is maintained for 5 seconds it is capable of being hit, therefore there is an intention to trade.

Regretably this rule is breached more than it is honoured. We continue to see large orders appear and evaporate within nano-seconds. A simple solution would be to introduce a cancellation fee for all orders of 50+ lots that are withdrawn within 60 seconds, or, have the SFE SYCOM system apply a lock-in feature where all orders of 50+ lots are locked in for 5 minutes. Such a simple solution would encourage a greater degree of caution and transparency. It is reasonable to expect principals transacting in 50+ lots or more know what they are doing, and do it with care. Operators of orders that size, who make a mistake, can afford to incur a cancellation fee to correct the error.

The ISE and Chicago Board Options Exchange, the two largest options exchanges, charge $1.25 and $1 per cancellation, respectively, when a customer's monthly order cancellations (over a certain minimum) exceed its executed orders.

source Michael Evans SMH August 29, 2005 .. SMH headline "broker fined for tricky futures trading"
Broking firm Fimat Australia has been fined $25,000 - the maximum possible - for deliberately breaching trading rules by entering orders without an intent to trade .. In a stinging ruling, the Sydney Futures Exchange said senior Fimat management had shown a "disregard" for operating rules as a "result of their direct involvement in the trading actions and decision making". Fimat, a wholly owned subsidiary of the Societe Generale Group, was found to have breached SFE rules on entering orders without an intent to trade .. The SFE said it had only recently disciplined Fimat in relation to "prior breaches", including entering orders without an intent to trade.

market depth - (c) - stealth trading

market depth - (d) - iceberg orders

market depth - (e) - impairment

The value of market-depth has become impaired

(a) data providers pre-process data from the exchanges
(b) when exchanges are busy or overloaded, data transmission can fall behind by 40-60 seconds
(c) when exchanges are busy or overloaded, data vendors don't transmit non-sales data
(d) market-makers don't suffer these impediments, as they
• have direct access to the exchange.
• are not dependent on data vendors for access

market depth - (f) - quicksand

There are two categories of participants in the order-book - Naturals and the Market-Maker.
For extended periods of time, the market-maker is the only occupant of the order-book.
It is essential to be aware when the market-maker occupies both sides of the book.
It is helpful to know to what extent naturals are participating and in what direction.
While naturals are absent and you deal with the market-maker you may have to tolerate some pain.
Discussed in depth in the following section.
market-makers and market-making

market depth - (g) - sweeping the market

The use of icebergs has thinned out the "visible-order-book" making it difficult to obtain supply. Execution of a single substantial "at-market-order" while the order-book is thin, sweeps the market, moving price 4 and 5 points in a micro-second.

An "at-market-order" for a quantity exceeding that quantity available at the front of the opposing queue will clean out the front of the queue, lift price 1 point, take what's available at the next level, and keep going until the order is exhausted. If the available market is populated with 1 x lots at each of 5 levels, a 5 x lot market order will lift price 5 levels.

Fully explained in sweeping the market

market depth - (h) - during pre-open

what does market depth look like during the preopen

Time 09:42 am

Time 09:46 am

Time 09:48 am

understanding market-depth Market-Depth represents only those quantities available in the "visible market" at any given time. Comprising three groups of participants. A market-maker, some locals, and naturals. Locals can perform much the same function as the market-maker. A natural is anyone else, including hedge-funds, arbitragers, retail-traders and lone-traders. For long periods of time the market-maker is the only occupant of both sides of the market-depth. Evidenced by the absence of naturals. When the market-maker is the only "offeror" is important to short-term traders and un-important to TA practitioners and position traders. Understanding this can be advantageous to short-term lone-traders. Entering the market when naturals are absent from the order-book can be an anxious time because you will be on the other side of the market-maker who is not going to give you a free ride and hand you money on a plate. More than likely the market-maker will move against you immediately and test your resolve. Understand one thing. The market-maker knows at all times how much of the order-book they comprise. detecting the market-maker Observing the composition of the order-book is straight forward. The data required to obtain this information is in the market place continuously. It just requires knowing where to look. And what to look for. Simple know-how.
	AUD $100	e-document including examples available immediately. click "return to camron" in middle of receipt to proceed to info page

If you found this helpful - help keep the site going