the foundation of tape-reading is
• screen time, and
• who the hitters and sitters are
There are two groups. Naturals and the Market-Maker. Each behaves differently.
Each uses different methods and different tools. see market maker section.
what is tape-reading
Tape Reading is a collective term defining a group of activities.
It involves the observation of three separate, parallel universes
bid queue
ask queue
course of sales
Of significance can be
any one single event, or
the sum of the events
activity (or absence of activity) in any of the universes
number of transactions
speed
price
volume
direction
subsequent reaction to any one of the above
definitions of tape-reading
trade-ideas
Watching every print and every change to the bid and ask.
investorwords
Anticipating short-term price changes by observing price and volume information.
financial dictionary
Anticipating performance by monitoring price changes as they occur.
trading day - Alan Farley
Memorize key price levels. Observe reactions when price approaches critical points.
Quiet times, lunch-time, holidays, offer prime conditions to gun support, and trigger stop locations.
Since Farley's 2002 article was written, wholesale changes have occurred in electronic-markets.
The 2008 article contains excellent observations on the changes, and how to handle them.
(a) Prime-Broking and the use of electronic-trading platforms.
(b) Consolidation and globalisation. An explosion in the use of algorithm trading systems.
(c) ECN's using dark-pools, dark-depth, invisible depth, icebergs, and fragmentation.
(d) market-making robots
(a) reading the market - 2002
In 2002 we wrote
Searched the web long and hard for articles on Tape Reading. Found a few. Not many. They don't leap out. It's an obscure corner of the US market. Most articles refer to it indirectly without getting into the mechanics. Most explain what it is, (by indirect reference to the original ticker tape), and what it achieved, but none got into specifics, how it works, with examples. Or how it's used, the decision making processes that flow from it. Most explain the original ticker tape, and how the scrolling CNBC ticker was different, and not what they were referring to. Nearly half were references to books, published containing detailed explanations. Had to buy the book. Accompanying book reviews were invariably critical, indicating nearly 70% of the content of each book dealt with the authors trading experiences, and the motivational aspects of their trading. The usual psycho-babble. A common complaint - it's like reading the same book over again. Read one, you've read them all. None of the books delved into the main subject. A lot of research to discover the american market refers to "course of sales" as "time and sales". Only one site identified "time and sales" as being equivalent to the "tape"
Now there is an avalanche of articles on Tape-Reading
This entire camron site sets out, item by item, the components of tape-reading.
(b) hitters and sitters - 2003
2003 we published hitting and sitting - how to read the tape
Understanding the behaviour of players in The Game begins here.
It is here, where the many decisions, made remotely, are played out electronically.
Understanding the electronic market depends on understanding the following matrix.
The "trade classification" feature is developed from this section.
There are 4 on-field game positions. Players can occupy any one position at any time.
Many rotate through each position during the course of the game.
Some prefer being sitters. Others prefer being hitters.
a Long Sitter - a buyer who sits in the bid queue
a Long Hitter - a seller who hits long sitters
a Short Sitter - a seller who sits in the offer queue
a Short Hitter - a buyer who hits short sitters
It's a binary state 4-element matrix.
Binary in that a player can either hit or be hit. OR. hit or sit.
behaviour characteristics
• An order sitting in the queue is a limit order. A sitter
• An "at market" order (hit) is never seen in the queue.
• Large limit orders are rarely seen sitting either side of the market.
• Be put on enquiry if you see it. Wont last long.
• A large order will not be placed in the queue where everyone can see it.
• An "at market" order (hit) of 500 could sweep price up/down many points, depending on depth.
• Large orders are broken into smaller lots as iceberg orders.
• Institutions use up to 3 brokers to spread large orders. 1 iceberg spawns 3 icebergs.
• Sitters tend to be exits.
• Hitters tend to be either entries, or, exits under pressure (pain barrier), or stops.
• Pressure does not come from sitters. It comes from hitters.
• Collective pressure arises where sitters congregate on a boundary. All can see it.
(c) hitters and sitters - 2008
2007 we published the pre-open session and the privileges and monopoly power of the Market-Maker
(d) market-maker is the sitter
2008 we published market-making in which we conclude the market-maker is 90% of both sides of the order-book (ie the main sitter) and responsible for a great deal of the action under the zero-profit rule, reducing the value of the course of sales.
In this article we comment on the thin-ness of the order-book, due to icebergs.
sweep-orders can move price 5 to 10 points in less than a second. Once a sweep order starts it can't stop until it has completed. Stop-orders touched in the midst of a sweep can only be filled at the point the sweep-order completes, which can be some distance from where the stop-orders were touched. Tight stops can/will produce instantaneous fill and exit.
Computer processing is sequential. If three substanial "at market" orders are released (almost) simultaneously, they are accepted in time sequence. They all become sweep orders. Each will be processed in sequence. If the first sweep order triggers a stop, that stop-order is not executed until the 3rd sweep-order has been processed. It will be executed 4th in sequence.
Farley's 2008 commentary states Lone-Traders won't survive unless they adapt to the electronic market. Phantom Pricing, Dummy Orders, Icebergs. Relentless computer programs, micro-second bursts, lightning-speed algorithms have made DOM, market-depth or order-book, nearly useless for analysis of short-term supply and demand.
We don't entirely subscribe to those views. Algorithms have their own characteristics, which are detailed fully in the above 3 research papers on preopen, marketmaking and sweeping. Put them together and you will have some idea what you are dealing with. Once you have that understanding you will be more able to identify them.
Here's a clue.
Large icebergs have their own characteristics.
There are two main groups of players. Naturals and the market-maker. One group are the icebergs and the other group are the icebreakers. The icebreaker won't try and smash through in one hit. It's a game of cat-'n'-mouse. It's to do with the speed of the icebreaker and the reaction when it hits an iceberg. An iceberg is short-term resistance. It will be broken down. Eventually. Larger icebergs, or longer term resistance will be found at each controlzone or what we call train stations, which are equi-distant from one-another.
Icebergs release their calves as either (a) "limit orders" at the same level which present one set of characteristics, or (b) "at market orders" which present a different set of characteristics. If you watch the bid, offer, and course of sales, and know what you're looking for, they become fairly evident.
Under conditions (a) and (b) there are many of them. The icebreaker doesn't have to keep smashing away. It can back off and wait for the calves to stop releasing, and then have another gentle go.
You see, an icebreaker doesn't need to smack head-on into an iceberg to get a response. It only needs to nudge the iceberg then back off and wait and see what happens. How many calves are released?, what speed they're released at?, whether they're "at-market" or "limit".
