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Explain the order book
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Created: by Pete Schweaty Attachments:4

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Explain the order book

  #1 (permalink)
Trading for Fun
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Explain the order book

I have a question for some people who are experienced with order flow, the DOM, and price action. I have noticed this behavior pretty regularly on the ZS, but I am sure it is not exclusive to only that instrument. I have attached few images that were taken over about a half hour.

In the first image you can see the market was trending up as it had since the close yesterday. I have two red lines drawn above the current price as area to watch for resistance. They were the bottom and top of a gap after the USDA crop report on Monday. You can see the Asks in the order book greatly out number the Bids. Am I wrong in assuming that this means other sellers are looking at that area also? There are huge sell orders at 78.75, 79.00, and every tick all the way up to 80.00.

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I noticed that the following happens quite often. The price slams through all of those sell orders and keeps chugging higher.
You can see that there is still a big ask size at about 83. The line at 82 represents the gap being filled. Dont pay any attention to the first two arrows pointing up. They were for something else.

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When the price hits 82 it stops and reverses strongly, as I thought it would (not to pat myself on the back). You can also see the ask orders refresh at 80 and 81 as the market moves lower.

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That turns out to be the high of the morning and the market moves back down into open price of the pit session.

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What is happening here?


Last edited by Pete Schweaty; October 2nd, 2013 at 01:12 PM.
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  #3 (permalink)
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If I understand it correctly, and I may be way off (thats why I am asking), those huge sell orders represent commercial selling. There is no way anyone can get filled for several hundred orders in this market all at once . . it's not that deep. The commercials sell at even numbers like 80, 81, 82 to scale into their short positions. At some point the market starts to move down and will continue to do so until profit taking occurs or market sentiment changes.

So how do we as speculators know when the market will reverse? Why does it seem that sometimes those sell orders are filled, and sometimes they are pulled at the last second. Is there anyway to tell the difference between someone trying to bid the market higher or lower, and actual commercial orders?

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Pete Schweaty View Post
If I understand it correctly, and I may be way off (thats why I am asking), those huge sell orders represent commercial selling. There is no way anyone can get filled for several hundred orders in this market all at once . . it's not that deep. The commercials sell at even numbers like 80, 81, 82 to scale into their short positions. At some point the market starts to move down and will continue to do so until profit taking occurs or market sentiment changes.

So how do we as speculators know when the market will reverse? Why does it seem that sometimes those sell orders are filled, and sometimes they are pulled at the last second. Is there anyway to tell the difference between someone trying to bid the market higher or lower, and actual commercial orders?


Short answer (TLDR): You can never truly know.

Long answer: Book changes are not relevant anymore to speculative trading. You never *really know 100%* when the market will reverse. The best you can do is use scientific theory to create a system with positive expectancy and bring it into production (live). And if it works, you use it, and if not; you lose it.

Sometimes orders get filled and sometimes they don't. It's called supply, demand and discretion. ES futures was designed to be arb'd against cash S&P. A lot of the ES futures passive quote(s) (most if not all) are priced such that an immediate profit can be booked if an aggressor transacts at the price of the passive quote(s)-- But it doesn't mean the trade will ever happen. And if that opportunity for immediate profit suddenly is no longer there, the quotes will be cancelled. That is most likely what you're seeing.

How can you tell if *someone* is trying to push market higher/lower? -- Is price going up/down? There's your answer. But this question itself is flawed because if you see someone trying to push market higher or lower-- you've already missed the move.

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  #5 (permalink)
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@Pete Schweaty
I noticed that the following happens quite often. The price slams through all of those sell orders and keeps chugging higher. <<

You cannot see the real picture on the DOM. What most likely happened was that big players were placing large offers to give others the false impression that market was weak. They are encouraging others to sell, and to whom? Yes, sell to the same guys placing the large offers! So the big guys are buying.

When price gets near to large offers all they do is pull the orders - causing a surge up - which then fills their waiting sell orders a few ticks higher. This game is called spoofing.

The final reversal is likely due to exhaustion as three or more pushes up since the spike earlier. Price action.

To see the above shenanigans happening, you can take a look at something like the Jigsaw tools where you get to see this spoofing very clearly. The DOM alone is not very helpful as you need to see the actual orders being placed, and the fake orders being added to/pulled from the DOM.

Richard
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  #6 (permalink)
Trading for Fun
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marketmaker View Post
Short answer (TLDR): You can never truly know.

Long answer: Book changes are not relevant anymore to speculative trading. You never *really know 100%* when the market will reverse. The best you can do is use scientific theory to create a system with positive expectancy and bring it into production (live). And if it works, you use it, and if not; you lose it.

Sometimes orders get filled and sometimes they don't. It's called supply, demand and discretion. ES futures was designed to be arb'd against cash S&P. A lot of the ES futures passive quote(s) (most if not all) are priced such that an immediate profit can be booked if an aggressor transacts at the price of the passive quote(s)-- But it doesn't mean the trade will ever happen. And if that opportunity for immediate profit suddenly is no longer there, the quotes will be cancelled. That is most likely what you're seeing.

How can you tell if *someone* is trying to push market higher/lower? -- Is price going up/down? There's your answer. But this question itself is flawed because if you see someone trying to push market higher or lower-- you've already missed the move.


RichardHK View Post
@Pete Schweaty

I noticed that the following happens quite often. The price slams through all of those sell orders and keeps chugging higher. <<

You cannot see the real picture on the DOM. What most likely happened was that big players were placing large offers to give others the false impression that market was weak. They are encouraging others to sell, and to whom? Yes, sell to the same guys placing the large offers! So the big guys are buying.

When price gets near to large offers all they do is pull the orders - causing a surge up - which then fills their waiting sell orders a few ticks higher. This game is called spoofing.

The final reversal is likely due to exhaustion as three or more pushes up since the spike earlier. Price action.

To see the above shenanigans happening, you can take a look at something like the Jigsaw tools where you get to see this spoofing very clearly. The DOM alone is not very helpful as you need to see the actual orders being placed, and the fake orders being added to/pulled from the DOM.

Thanks. I noticed it happens frequently. The large offers (or bids) are pulled right before price slams through them. Price will usually reverse, just not where those big orders are.

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  #7 (permalink)
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Little late to reply to OP, but I didn't see one explanation. Much of the volume you see on the book are working spread orders. In the case of ZS soybeans that might be the soybean crush spread or a calendar spread. Those spreads are constantly adjusting to maintain the proper spread, and/or work the front of book to optimize fill position (CME is a centralized exchange). Much of the volume is now done with servers close to the exchange, so it can look like there is plenty of liquidity at the front of the book, the liquidity can shift very quickly to maintain the spread.

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