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Security Shinobi

Extremely Stupid Question

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When a big player makes a buy order that's large enough to drive a price up, do they pay based on the price before the order went through, or the price after? This is so fundamental that I should know it already, but I haven't been able to find the information anywhere.

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Actually, it's a great question. Knowing market mechanics on an "atomic" level is a prerequisite to understanding orderflow, supply/demand imbalances, mean revision, short/long squeezes, and a whole host of other incredibly important concepts.

 

And of course, most people don't knoow any of it.

 

Anyway...there are bids, and there are offers. Lets say said large institution hits a "market order" (as opposed to a limit order)... to buy 100 lots of EUR/USD.

 

Lets say the last traded price was 1.3000

 

Now, lets say right now, there are only 2 lots available on the offer (the selling side) at 1.3000. Then, there are 18 lots currently available on the offer at 1.3001. Then, there are 40 lots currently available on the offer at 1.3002, and there are 200 lots available on the offer at 1.3003.

 

Here's how it works. His 100 lot bid at market (buy order) hits the currency exchange, and he gets filled on 2 of those 100 at price 1.3000. Then, since there are no more available on the offer at that price, his order continues to fill, but jumps up to the next price point, which is 1.3001. There, he gets 18 additional lots filled. So, he now has 20 out of 100... but there are no more on the offer (for sale) at 1.3001. So, his order continues to fill, but at the next highest price of 1.3002. At this price, there are 40 lots available on the offer. So, he fills an additional 40 lots at the 1.3002 price... bringing his filled amount to 60 lots. He has 40 more to go. Now, his order jumps up to the next price point of 1.3003...where there are 200 lots available on the offer.

 

So, he gets his final 40 lots filled at 1.3003. When he is done, there are still 160 lots available to anyone in the world who wants to pay the asking price of 1.3003.

 

Breakdown of his price:

 

2 lots @ 1.3000

18 lots @ 1.3001

40 lots @ 1.3002

40 lots @1.3003

TOTAL: 100 lots at an average fill price price of 1.300218

 

By executing this 100 lot order at market, the big player also was responsible for pushing price from 1.3000 up 3 pips, to 1.3003

 

Get it? Lemme know if u don't.

 

FTX

Edited by ForexTraderX

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When a big player makes a buy order that's large enough to drive a price up, do they pay based on the price before the order went through, or the price after? This is so fundamental that I should know it already, but I haven't been able to find the information anywhere.

 

ForexTraderX's has given a very detailed and helpful explanation.

 

The fundamental thing that you need to understand is order types - the difference between market orders (taking) and limit orders (making). All the different orders that you would use to enter, manage, or exit a position are variations or combinations of these two basic order types, and it is absolutely crucial that you fully understand them before you start trading.

 

I hope that helps.

 

BlueHorseshoe

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Depends on a few things. Lets say they are all market orders and they all get filled. Then they get what ever price they filled at. If they are limit orders then they get that price they were laid up at. So If they put a huge buy order at 1300 then they will fill at 1300. If they are market orders then they will start at 1300 and after all the sells are bought at 1300 they will go to the next tick up depending on the size of the buy order of course.

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Depends on a few things. Lets say they are all market orders and they all get filled. Then they get what ever price they filled at. If they are limit orders then they get that price they were laid up at. So If they put a huge buy order at 1300 then they will fill at 1300. If they are market orders then they will start at 1300 and after all the sells are bought at 1300 they will go to the next tick up depending on the size of the buy order of course.

 

I actually meant to say limit order, not market order, but you explained it anyway. Thanks. Although, if that's the case why doesn't everyone use limit orders all the time?

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Alot of traders use market orders to get out and limit orders to get in. Is this the right or the wrong way to do things? Little bit harder to say on that. Here is a few reasons why.

 

If you have a limit order to get in at a price and it trades at that price say 1300. And lets say there are 50 contracts there and you are number 45 in line at that price. well its going to have to trade at least 45 for you to get filled. If it trades only 44 then you don't get filled and you are left standing there. Now lets say the trade is bad and its going against you and you want to get out now and you use a market order and price just trades 1 lot at your stop out price. You could be number 2 if that market order executes quick.

 

On the other side if you use market orders to get in then you can and will get slippage meaning you will buy a tick up if you are going long.

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When a big player makes a buy order that's large enough to drive a price up, do they pay based on the price before the order went through, or the price after? This is so fundamental that I should know it already, but I haven't been able to find the information anywhere.

 

They ALWAYS use Algo, so nothings really change the price ---> Algorithmic trading - Wikipedia, the free encyclopedia

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Although, if that's the case why doesn't everyone use limit orders all the time?

 

Because a limit order may not get filled - for a limit order to be filled, someone has got to cross the spread with a market order. If you bid 100 limit, and the best ask is 102 (ie a 2 point spread), then for your order at 100 to be filled, a new seller has to enter the market and be willing to sell at 100, crossing the spread and stepping in front of the limit seller at 102. Then your orders will be matched and, assuming that you are the only bid at 100 and nothing else changes, the spread would widen to the next highest bid (99, say) by 102. A new limit seller might enter at 101, more limit buyers might come in at 100 or 101, or a massive buy market order may hit, and everybody selling at every price below 110 get taken out in a millisecond.

 

If there are a whole load of other buyers ahead of you in the queue at 100 (they placed their orders first), and only a few sellers cross the spread with market orders to trade at that price, then you won't get filled.

 

What does all this mean to you?

 

If you're "desperate" to get filled then you'd use a market order. The upside is you're guaranteed to get filled. The downside is that you will have to pay the spread (and possibly slippage).

 

If you're only prepared to buy or sell at a specific price then you'd use a limit order. The upside is that you'll make the spread if you get filled. The downside is that you might not get filled. Moreover, you'll always be filled on a losing trade, but you won't always be filled for a would-be winning trade (a loser must, by definition, trade through your limit price).

 

I strongly recommend that you spend some time getting a decent grasp of all this, otherwise you may not be able to execute effectively, regardless of how good your strategy is.

 

Regards,

 

BlueHorseshoe

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Alot of traders use market orders to get out and limit orders to get in. Is this the right or the wrong way to do things? Little bit harder to say on that. Here is a few reasons why.

 

If you have a limit order to get in at a price and it trades at that price say 1300. And lets say there are 50 contracts there and you are number 45 in line at that price. well its going to have to trade at least 45 for you to get filled. If it trades only 44 then you don't get filled and you are left standing there. Now lets say the trade is bad and its going against you and you want to get out now and you use a market order and price just trades 1 lot at your stop out price. You could be number 2 if that market order executes quick.

 

On the other side if you use market orders to get in then you can and will get slippage meaning you will buy a tick up if you are going long.

 

You'll always buy 'a tick up' - that's just paying the spread and happens EVERY time you use a market order. You can't get a market buy order filled at the best bid because nobody can sell to you on a limit at the best bid.

 

Slippage is where other market orders fill all the available limits on the other side of the book, that price tier collapses, and your order interacts at an even worse level. Normal market order - you pay the spread (minimum one tick). Slippage - you pay the spread and then some . . .

 

BlueHorseshoe

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... Although, if that's the case why doesn't everyone use limit orders all the time?

 

This is actually the key component to one of my entry setups. Traders use Market orders when they want to be certain of being filled. You can see evidence of this aggressive buying or selling clearly by following the bid or ask. These traders either need to exit a losing position (stops use market orders for exiting) or they want to be in on an anticipated move.

 

Many larger traders use market orders for entry and limit for exits because they want to be certain to be filled. The other larger players will use limits as price is moving against them in anticipation of the market turning around shortly in their favour. They do this to avoid the slippage mentioned above.

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This is actually the key component to one of my entry setups. Traders use Market orders when they want to be certain of being filled. You can see evidence of this aggressive buying or selling clearly by following the bid or ask. These traders either need to exit a losing position (stops use market orders for exiting) or they want to be in on an anticipated move.

 

Many larger traders use market orders for entry and limit for exits because they want to be certain to be filled. The other larger players will use limits as price is moving against them in anticipation of the market turning around shortly in their favour. They do this to avoid the slippage mentioned above.

 

No sophisticated larger market participant is using limit orders that you can detect (unless you have some seriously advanced algorithm for reconstructing icebergs, estimating PIQ etc) from the bid and ask. The only time they will show their hand in this way is when it's the last leg of a massive order and they no longer need to care. If they tipped their hand as clearly as you suggest then every retail trader would just front run them from the DOM.

 

BlueHorseshoe

 

ps I'm not trying to suggest that your entry setup doesn't work - stepping in front of fragmented net positive/negative order flow can work - it's just not for the simplified reason you suggest.

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I actually meant to say limit order, not market order, but you explained it anyway. Thanks. Although, if that's the case why doesn't everyone use limit orders all the time?

 

there are times you have to react fast because unexpected things happen..much better/worse economic data...or ABC rating announces an important downgrade...or natural disasters happen.

besides entering a limit order does not mean it will be filled.

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a big trader like that or a bank will chop it up into small pieces and then they drive the market in the oposit direction, if they want to buy the market they will start by selling it with small probe orders, these orders are small for them but huge for us, they have enough size to force the market down temporary, this will tempt the public and small traders to join in on the move in the wrong direction, when the big elephant think it's enough and he got the right price, he will dump larger orders into the market in the oposit direction trapping most of the small traders, their stops will be executed and bring even more power to this move, because if you buy you would have a stop loss to sell, so now everyone suddenly is selling, the big elephant now gets back all the small probes many times over. and our money goes into his pocket

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When a big player makes a buy order that's large enough to drive a price up, do they pay based on the price before the order went through, or the price after? This is so fundamental that I should know it already, but I haven't been able to find the information anywhere.

 

If its a market order, they pay whatever the market price on whatever shares are available at the time...if there are no shares available they will autmatically bid it up..

 

Big players are smarter than to put a market order in....they usually will hand the order to a trader and say "Buy all you can below X price"...so that the trader has some room to work and not run the price up...

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My reference was to detecting market orders.

 

You can't see unfilled market orders, and once they fill you don't know at what price they were actually intended to execute. Moreover, the significance of market orders can only be measured in relation to resting limit orders, and they're slippery and ephemeral things.

 

Unless you're able to piece everything that's going on together at very high speed (no offence, but I think that's probably beyond the capability of any human brain, yours included), then it is hard to see how you could divine anything of significance from this information.

 

I could easily be wrong though.

 

BlueHorseshoe

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When a big player makes a buy order that's large enough to drive a price up, do they pay based on the price before the order went through, or the price after? This is so fundamental that I should know it already, but I haven't been able to find the information anywhere.

 

Shinobi, being an ex stock broker I could answer the question better for equities as my seat was often next door to the trading room. As far as Forex goes, because the re is no centralized location most people couldnt answer that if they were in the biz 20 years. Most, not all. Le t me say from my watching documentaries on big players in both futures and forex as well as general common sense of 15 years as a small trader I can take an educated guess at the answer. If the order is a market order, the trader is going to get reamed. His order is going to as they say in trading room parlance, its going to get "worked." But even on a limit order, many factors come into play, politics being one. One thing is for sure...he is going to get a phone call from some guy out in God knows where to negotiate the price with him. And you can bet its a guy that makes a living doing exactly that!!!! Part salesman, part manager, part head trader for a firm and/or market maker. WHAT ELSE COULD POSSIBLY HAPPEN WITH SIZE THAT BIG. First of all if Im putting in anything over 5 million dollars I am not paying more than 1 -1/4 pip spread at most. Most!

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I will even be so brazen to say that some of the smaller firms might fill 1/10th of the order at the limit price, even if its at the bid price....and then fill the rest of the order at say 10-20 pips higher and claim that price moved while the order was being ok'ed by the "boss" and as stupid as that answer is, they would chance it and hope the guy accepted the answer. Worst case for the firm..............theyd have to break the trade. Best case, they pocket hundreds of thousands of dollars. Worst case for the trader....the firm shuts down, especially if located outsiDE THE usa! "They have games they havent even invented yet." Read that last sentence again. -)

 

Ask if you need clarification.

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You can't see unfilled market orders, and once they fill you don't know at what price they were actually intended to execute. Moreover, the significance of market orders can only be measured in relation to resting limit orders, and they're slippery and ephemeral things.

 

Unless you're able to piece everything that's going on together at very high speed (no offence, but I think that's probably beyond the capability of any human brain, yours included), then it is hard to see how you could divine anything of significance from this information.

 

I could easily be wrong though.

 

BlueHorseshoe

 

 

1. There is no such thing as an unfilled market order (except in the 20-30 ms it takes to complete)

2. I am interested to see when traders are so committed to get in to a move that they execute using a market order.

3. You can see this information by looking at each transaction and determining whether it was filled on the bid or ask

4. Once you see that, and then see the next price, and the next price after that with the same aggressive behaviour - you can then be confident that, say 70-80% of the time - the market will move in the direction you noted.

 

Here is an example from yesterday.

 

attachment.php?attachmentid=32409&stc=1&d=1351256527

 

The first zone on this chart that presents an opportunity for me is shown in the green shaded area at 9:20. Any retrace back to this zone is a long entry for me, given that other factors that I consider support that decision.

 

The next zone that present an opportunity for me is shown on the 9:40 sell off bar which has created a "sell" zone that I track and any retrace back to that zone creates an opportunity to execute a trade, given it is supported by the other decision factors that may be considered. In this case I did take the short trade at 1413.75 which was paid nicely.

2012-10-26_0900_TL_EXAMPLE.thumb.png.e55150efd7baadbf08dbb9364f879de5.png

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1. There is no such thing as an unfilled market order (except in the 20-30 ms it takes to complete)

2. I am interested to see when traders are so committed to get in to a move that they execute using a market order.

3. You can see this information by looking at each transaction and determining whether it was filled on the bid or ask

4. Once you see that, and then see the next price, and the next price after that with the same aggressive behaviour - you can then be confident that, say 70-80% of the time - the market will move in the direction you noted.

 

Here is an example from yesterday.

 

attachment.php?attachmentid=32409&stc=1&d=1351256527

 

The first zone on this chart that presents an opportunity for me is shown in the green shaded area at 9:20. Any retrace back to this zone is a long entry for me, given that other factors that I consider support that decision.

 

The next zone that present an opportunity for me is shown on the 9:40 sell off bar which has created a "sell" zone that I track and any retrace back to that zone creates an opportunity to execute a trade, given it is supported by the other decision factors that may be considered. In this case I did take the short trade at 1413.75 which was paid nicely.

 

Jeez, what charting software are you using?

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1. There is no such thing as an unfilled market order (except in the 20-30 ms it takes to complete)

2. I am interested to see when traders are so committed to get in to a move that they execute using a market order.

3. You can see this information by looking at each transaction and determining whether it was filled on the bid or ask

4. Once you see that, and then see the next price, and the next price after that with the same aggressive behaviour - you can then be confident that, say 70-80% of the time - the market will move in the direction you noted.

 

 

Hi Bakrob,

 

Thanks for replying.

 

RE: unfilled market orders . . . any order that is not a limit order will be executed at market. So when you see a boat load of market orders hit the bid, say, then rather than knowing that a lot of short sellers are committed to get in on the move, how do you know that a bunch of stops weren't just triggered?

 

RE: filled on the bid or the ask . . . I still maintain that this is a very partial picture. The relationship/relative quantities between limits and stops/market orders on both sides of the spread has got to be far more meaningful than just up and down volume. It doesn't matter how many hundreds of sellers get very enthusiastic with market orders if the bid is 20k deep, for example.

 

RE: your chart . . . thanks for posting this - it's really fascinating. What you do is clearly intelligent and well thought through, and far smarter than anything I have managed to put together with the same data. If it's working for you then there is no need for us to continue this conversation. And completely ignoring volume delta etc, the general approach perfectly fits with my understanding of how to trade the ES intraday, which is encouraging for me.

 

On a side note, TradeStation 9.2 looks great - I really should remember to hit that 'UPDATE' button the next time it flashes up!

 

Cheers,

 

BlueHorseshoe

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