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Resting bids above market or offers below market?

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charlotte nc
Trading Experience: Master
Platform: ninjatrader
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Very Interesting Discussion

Hi tpredictor,

I like where you are going with this... I think you are correct and I wanted to verify that I am understanding this the way you are presenting it.

If a new level is created above the current level, then we know where the resting ask volumes come from because there is already several levels of resting orders that can be observed on various DOMS, but you are bringing up the topic of the bid volumes. Where do they come from since you can't submit limit orders (Buy Bid above the market, and Sell Ask below the market). But these new levels get filled almost instantly once the level is created with these types of orders. So where do they come from?

One of the ideas that you mentioned was stop limit orders that are sent as conditional market orders and not triggered until the new level gets created. Once the new level is created and the threshold price is triggered, the stop limit orders become a regular limit order and work accordingly from there.

Now from my research (Spreadsheet enclosed) I suspect the stop limit orders being first, is the most likely way this new level is being filled. The reason I think this is that I see in the data when a new level is created up for example, the side that get's worked first is usually the bids. By contrast if a new level is created down, then the side that gets worked first is the asks. The data I am enclosing comes from NinjaTrader / ES and I ran the data using the OnMarketData event handler to try to get every change as granular as possible. I sequenced the events of every level between Last = bid and Last = Ask to get a sense of how it moves. I think I am likely missing some of the granularity though because I never see volume drop close to 0 on either side, but this is as granular as NT / Kinetic had it. But the pattern I see is that on new levels, the side that gets served first was typically (90% or more of the time) the side that was not resting on the DOM but came into the level seemingly at the last second. So if this side is being given priority and served first, then this is likely due to using a different order type such as a stop limit order which gets executed first.

Maybe I am off on how to interpret this, but I am throwing it out there. It looks like the data I have aligns with your theory about stop limits going first though. Have you gained any more insight into these mechanics since this original post?


tpredictor View Post
I still have not heard the precise mechanics that matter. I'm sure this can vary from product to product and exchange to exchange but what we're trying to get at is precisely how a new level is filled.

There are a few possibilities

1. The exchange processes a resting dark limit order pool, the stop limits first in fifo order
2. Next the exchange processes any submitted orders, i.e. low latency

If (1) is the case, do we know if the HFT are stacking the "dark" book as well with orders? I think a stop limit will still be slower because remember after the depth is cleared then the market doesn't need to trade at a higher level before the depth is filled. So, I'm thinking there is truly not a queue for latent side buy/sell capacity. But, if there were then notice it would level the playing field.

Here is what I think happens in something like the es, the market is moving up.

1. The offers clear. The spread widens by 1 tick but we do not see this.
2. HFT traders will submit new limit orders to fill the book in microseconds perhaps using peg orders ? or just using HFT software.
3. A trade triggers on the ask side.
4. Stop limits are processed in FIFO order after the HFT traders have filled the book.

With something BTC/USD here is what happens:

1. The offer clears. The spread widens to multiple cents usually
2. Traders will start to fill the levels closest to the bid.
3. Other more aggressive HFT traders will see the new fills and start to fill levels in front of them.
4. The spread will narrow to the minimum spread of 1 cent in most cases within moments.

Attached Files
Register to download File Type: xlsx NanoStructure Research.xlsx (275.1 KB, 1 views)
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