Understanding the Auction Process

[Northern boy 10]

Why can't day traders not have a 'directional bias'?

 

because they also have to cover their positions by the last bell, so the same influence they had opening the position is made neutral by closing it. plus they care more for a positional loss on that day than longer term traders do. so that's why i'm saying VAH and VAL are defined by non-daytraders. Perhaps those extended limits are set by those with less incremental views.

 

i think this should go into "crash course into MP", i thought this thread was suitable but now i'm noticing it's not. If someone is able to move it that'd be cool.

[Rocky Mtn Trader 10]

thank you for all these responses. Hopefully this thread is a good education on how the different markets move, and what causes them to move.

 

In response to the last few posts....If IBM had some news that cause that stock to spike dramatically...either up or down....wouldn't that have more affect on the YM moving than more traders buying more contracts in the YM market??

 

Look at how closely the YM and ES move in unison of each other. Yet the ES trades 2.5 million contracts a day, while the YM only trades 600k contracts a day. Don't these underlying stocks have more effect on the ES and YM than traders trading these markets have? (I think we are clear that the underlying stocks are not the only thing moving these markets).

 

I put this thread in the Market Profile section because I know that MP is heavily based on the Profile of the market in relation to price, time, and volume. I know that the ES, ER, and YM are traded by many different type traders from daytraders, floor traders, large institutions, etc...

 

A question? Can large institutions, or "others type traders" have an influence on the ES, ER, or YM?...meaning...can they manipulate or become "market movers?" I know they can with the underlying stocks?

 

Do I need to know this to trade these markets?...no, I don't. Just trying the better understand the total madness.

.

Edited June 22, 2008 by Rocky Mtn Trader

[Guest forsearch]

The curious thing is that for all the hype that the DOW gets all day on CNBC, the futures still have less volume than either the Nasdaq or even the Russell for that matter.

 

Go figure.

 

-fs

[OAC 10]

The curious thing is that for all the hype that the DOW gets all day on CNBC, the futures still have less volume than either the Nasdaq or even the Russell for that matter.

 

Go figure.

 

-fs

 

That is probably due to Options Expiration activities this past Friday.

Dow only represents 30 stocks while Nasdaq and Russel index represent thousands of companies. If you are a large institutional fund manger, you would rather hedge your portfolio by buying options or futures on indices that represent the broad market than rather just a handful of companies.

[Guest forsearch]

That is probably due to Options Expiration activities this past Friday.

 

No, it is not.

 

Go look at the volume for the Dow, Nasdaq and Russell futures and compare for yourself.

 

You'll see what I'm referring to.

 

-fs

[OAC 10]

No, it is not.

 

Go look at the volume for the Dow, Nasdaq and Russell futures and compare for yourself.

 

You'll see what I'm referring to.

 

-fs

 

I really don't know what you are referring to. Most professional would advice you to ignore volumes on an option expiration day. Much of the volume is institutional driven and result of unwinding of non-directional neutral strategies.

[Guest forsearch]

I'm referring to the long-term daily volume of each of these indices, not just on one day.

 

Look at a daily chart for all three: Dow, Nasdaq and Russell futures. Plot the volume.

 

Compare and contrast.

 

-fs.

[firewalker 10]

The curious thing is that for all the hype that the DOW gets all day on CNBC, the futures still have less volume than either the Nasdaq or even the Russell for that matter.

 

Go figure.

 

-fs

 

That's a good point, but the DOW mini has always been traded less than the other e-minis. I suspect the lower trading volume used to be a result of traders preferring the CME platform of Globex, instead the ECBOT. The ECBOT didn't have the stability of Globex imo. Although because of the merger of the two, the DOW mini trades on Globex since the beginning of this year.

 

The difference in trading volume is probably something which has grown historically? Just a thought...

[ammo 10]

dow has 30 stocks,all blue chips so heavy capital,er has 2000 stocks,es has 500, may have something to do with it,i dont trade the dow because it's only $5 a tick

[darthtrader2.0 10]

A question? Can large institutions, or "others type traders" have an influence on the ES, ER, or YM?...meaning...can they manipulate or become "market movers?" I know they can with the underlying stocks?

.

 

In theory of course they have enough capital to blast the futures but in practice they wouldn't. All they would be doing is giving their money away to their competition. If Goldman started blasting YM all the other big guys arbitrage programs would start blasting them in the other direction and Goldman would just be giving risk free money to the competition.

Personally, I think "manipulation" is the most overused word in retail trading. Trade volume doesn't break down to Us vs Them...it breaks down to Them vs Them...retail guys are less than 5% of the volume and mostly just in the way of 2 huge sharks trying to eat eachother.

[firewalker 10]

dow has 30 stocks,all blue chips so heavy capital,er has 2000 stocks,es has 500, may have something to do with it,i dont trade the dow because it's only $5 a tick

 

Correct about the stocks, but I don't see how the tick size matters.

For me, an instrument is attractive when it has a decent daily range. Tick size is irrelevant for me, volatility is more important.

 

Suppose (pretty close to real life example):

ES: $12.50/tick, average range/day = 20 points

YM: $5/tick, average range/day = 200 points

 

What would you prefer?

[atto 20]

Suppose (pretty close to real life example):

ES: $12.50/tick, average range/day = 20 points

YM: $5/tick, average range/day = 200 points

 

What would you prefer?

Correct. At the end of the day, 1 YM is about the same as 1 ES when you take into account $/tick and range. However, the ES has significantly more volume than the YM, so if you are trading large size (or off-hours), the ES can be much more favorable.

 

My main complaint with the ES is that fills aren't great due to the larger relative tick size (1 tick ES has the approximate effective range as 2.5 pts YM). I would really like the ES to switch to $0.10 ticks, but I doubt that'll happen.

[MC 10]

Correct about the stocks, but I don't see how the tick size matters.

For me, an instrument is attractive when it has a decent daily range. Tick size is irrelevant for me, volatility is more important.

 

Suppose (pretty close to real life example):

ES: $12.50/tick, average range/day = 20 points

YM: $5/tick, average range/day = 200 points

 

What would you prefer?

 

Since the YM only has 1 tick per point, I prefer to look at the relationship point for point myself.

 

ES: $50/point, average range/day = 20 points = $1000

YM: $5/point, average range/day = 200 points = $1000

 

So the max gain/loss in theory would be the same on the ES and the YM using your daily range calculations. But of course that's assuming you buy/sell the daily extremes. The reality is $50 per point can chop you up quicker than $5 per point. So the ES is great additional leverage if you are a profitable trader. If you're not yet profitable and consistant the ES could chew your equity up quicker.

 

Also I've only traded the YM live, I've heard and noticed on paper how the ES fills can be tricky at times due to the depth of market. DOM can be a double edged sword it seems. Great liquidity if people are spaced out far enough, harder to get entry or exit if everyone is in line at the same price level.

 

Any thoughts on that fellas?

[atto 20]

Any thoughts on that fellas?

In my opinion, the YM is great for beginners or anyone trading smaller sizes (or is able to effectively scale in and out as to not disrupt the market). Fills are wonderful, and the price action is nearly identical to the ES.

 

Markets also have "personalities". The ER2, for instance, jumps around and moves freely, and once it breaks out, it's gone. The NQ seems to be the most directional of the US index futures. The ES is like a giant train. It moves slower, and will often come back before breaking out. The YM is a moderate choice, which can make it easier for starting traders (of course, this is just my opinion).

 

The ES will get you, as I mentioned above, with its fills. Since ES ticks are 2.5 times the relative size of YM ticks (0.25 pts ES is roughly 2.5 pts YM), price action is a little more "blocky". That extra size hurts fills.

[Guest forsearch]

That's a good point, but the DOW mini has always been traded less than the other e-minis. I suspect the lower trading volume used to be a result of traders preferring the CME platform of Globex, instead the ECBOT. The ECBOT didn't have the stability of Globex imo. Although because of the merger of the two, the DOW mini trades on Globex since the beginning of this year.

 

The difference in trading volume is probably something which has grown historically? Just a thought...

 

Consider this:

 

The Dow open outcry futures trading pit for the "big" contract is now in the same area as the Nasdaq, S&P and Russell at the CME/CBOT building.

 

The Russell pit will be no more in Sept as the futures move to ICE.

 

So why is the CME Russell contract still getting more volume then the Dow?

 

Guess we'll have to wait until Sept to gauge the real impact here...

 

-fs

[firewalker 10]

So why is the CME Russell contract still getting more volume then the Dow?

 

Guess we'll have to wait until Sept to gauge the real impact here...

 

-fs

 

That's a good question, but I can't answer it

 

I do know that in terms of average rage compared to tick size the Russell used to beat the rest. I haven't checked lately since I don't trade the ER2 anymore, but the greater the potential, the greater the risk as well...

[BlowFish 10]

Correct about the stocks, but I don't see how the tick size matters.

For me, an instrument is attractive when it has a decent daily range. Tick size is irrelevant for me, volatility is more important.

 

Suppose (pretty close to real life example):

ES: $12.50/tick, average range/day = 20 points

YM: $5/tick, average range/day = 200 points

 

What would you prefer?

 

Smaller tick size tends to increases volatility. The reason being the premium that traders get to offer the option to trade (offering liquidity through limit orders) is much smaller if the spread is smaller. Assuming the spread is 1 tick it costs more to trade immediately in the ES than the YM (with a market order). Why offer liquidity in the YM when it only costs 5 bucks to enter late?

 

I guess that explains the popularity of instruments like the YM & ER amongst day traders.

[firewalker 10]

Smaller tick size tends to increases volatility. The reason being the premium that traders get to offer the option to trade (offering liquidity through limit orders) is much smaller if the spread is smaller. Assuming the spread is 1 tick it costs more to trade immediately in the ES than the YM (with a market order). Why offer liquidity in the YM when it only costs 5 bucks to enter late?

 

I guess that explains the popularity of instruments like the YM & ER amongst day traders.

 

Perhaps that's already the reason why those instruments - in my experience - are much more prone to spikes and false breakouts than the NQ or the ES. If you look at how these markets react around NFP or FOMC, the NQ is probably the smoothest and there seems to be less spikes. I have no hard evidence for this, but just take any number of days and you'll see it's pretty much the case.

[Guest forsearch]

Smaller tick size tends to increases volatility. The reason being the premium that traders get to offer the option to trade (offering liquidity through limit orders) is much smaller if the spread is smaller. Assuming the spread is 1 tick it costs more to trade immediately in the ES than the YM (with a market order). Why offer liquidity in the YM when it only costs 5 bucks to enter late?

 

I guess that explains the popularity of instruments like the YM & ER amongst day traders.

 

The NQ and YM have the SAME tick size ($5/tick).

 

So why is the YM considered more volatile than the NQ?

 

Yet... why does the NQ have more than twice the volume (on average) than the YM?

 

Things to ponder....

 

-fs

[MightyMouse 12]

MY 5 cents

 

The Bid and ask will on YM or ES will go up and down, but there will not be any volume if it does not trade and there will not be a profile with no trades. Ym and es do not go up or down EXACTLY like the underlying. In fact ,frequently they will go up by more or down by less than the underlying as market participants trade, expressing their directional conviction or lack of directional conviction in the futures market. The YM, for example, can absolutely lead or lag the dow’s movement and is indicative of the collective will of the futures traders trading that particular contract month. In the case where the YM is ahead of the Dow, it creates an arbitrage opportunity for arbitrageurs to sell the YM and buy the underlying DOW stocks, bringing the index and YM back in line, while snatching a small guaranteed profit and at the same time making the arbitrage opportunity disappear. So you can have a day where the YM is rising in price by more than the DOW and a futures trader looking at the volume may see a lot of “selling” of the YM futures and comment on the oddity of the fact that the YM is rising in price while there are more sellers than buyers. You’ll have difficultly having any room operator explain that one to you. Volume in the futures markets for ES can be very confusing because ES and others are tied to so many different financial instruments, that the motives for buying or selling the futures are not the buying and selling in the intuitive sense.

 

So, a large buyer buying 1000 YM futures at the top of the days range does not necessarily mean that he believes the market has higher to go. It could mean that he is buying the futures and simultaneously selling some other underlying instrument to take advantage of a premium that was created by the overzealous buying that brought the YM to the top of the range in the first place. Therefore, naively following the “smart money” could only lead you into a trap set by other traders who are aware of the intentions of the large contract traders. They will happily sell you a one or two lot and buy it back from you 40 ticks lower.

 

 

The reason why the S&P and the Dow are so correlated is really just a statistical phenomenon. Any group of randomly selected stocks that = 30 will mimic to a very high degree a lager basket of stocks by about 98%. (If you need to, try it yourself. Randomly select 30 large cap stocks and compare to the S&P).

 

Do not make auction market theory such an alien concept. Almost anything you buy or sell is priced based on an auction process. MOM has a few good examples to try to explain the auction process outside of the financial world.

 

It takes a long time to fully understand MP. Then, after reading and studying MOM for a few months, you need to develop a trading strategy around MP. MP is NOT a trading strategy. If you speak to someone who is a room operator, trader, etc., who uses MP but uses other indicators too, then they really do not know how to use MP. You either know how to use MP and use it exclusively or do not really know how to benefit from MP.

 

Sorry about the length.

[fifty2aces 10]

In response to the last few posts....If IBM had some news that cause that stock to spike dramatically...either up or down....wouldn't that have more affect on the YM moving than more traders buying more contracts in the YM market??

 

Look at how closely the YM and ES move in unison of each other. Yet the ES trades 2.5 million contracts a day, while the YM only trades 600k contracts a day. Don't these underlying stocks have more effect on the ES and YM than traders trading these markets have? (I think we are clear that the underlying stocks are not the only thing moving these markets).

 

I think you're getting a bit confused - ultimately YM and ES can do what they want - there is nothing forcing them to move in line with the underlying indices except people trading the futures (whether in the pit or electronically). The reason that the futures move in line with the stocks is that if they move too far out of line, arbitrageurs will start buying/selling the underlying and futures to bring them back into line.

 

So really, YM traders can not only move the YM, they can move the underlying stocks. For example, if traders start buying YM, driving the price up, arbitrageurs will start selling YM and buying the underlying stocks. If the original traders continue buying YM, this is likely to drive up the prices of the stocks to match the new higher prices of the futures.

 

Think of the cash and futures markets as being connected by an elastic band - they can move apart a bit (initiative activity by traders), but eventually they will be pulled back together (arbitrage). And either market can lead the other.

[MightyMouse 12]

The NQ and YM have the SAME tick size ($5/tick).

 

So why is the YM considered more volatile than the NQ?

 

Yet... why does the NQ have more than twice the volume (on average) than the YM?

 

Things to ponder....

 

-fs

 

Volume has to do with "popularity" of one indix over an other.

 

YM isn't significantly more or less volatile than NQ. But, because of it's size relative to NQ ( +- 11500 relative to +- 1939) a .5% swing will produce more gain or loss with YM than with NQ.

 

YM = 11500 X .5% =57.5 x $5 =$287.5

NQ= 1939 x .5% = 9.695 x $20 =$193.9

 

YM gives you more bang or pain for the buck.

[Guest forsearch]

Volume has to do with "popularity" of one indix over an other.

 

YM isn't significantly more or less volatile than NQ. But, because of it's size relative to NQ ( +- 11500 relative to +- 1939) a .5% swing will produce more gain or loss with YM than with NQ.

 

YM = 11500 X .5% =57.5 x $5 =$287.5

NQ= 1939 x .5% = 9.695 x $20 =$193.9

 

YM gives you more bang or pain for the buck.

 

Perhaps. But with all the talking heads on CNBC et al hyping the DOW all day long, you'd think the volume might be higher than (or at least as high as) the NQ.

[OAC 10]

Perhaps. But with all the talking heads on CNBC et al hyping the DOW all day long, you'd think the volume might be higher than (or at least as high as) the NQ.

 

Who watches CNBC ? Old ladies buying 100 shares of DIA or QQQQ ?

[OAC 10]

Who watches CNBC ? Old ladies buying 100 shares of DIA or QQQQ ?

 

Don't want to sound too harsh. But if you were a rookie starting out at a proprietary firm, they would tell you the samething.