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Hello,
it's been a while I haven't traded.
I looked at the recent market action and saw huge daily moves with lots of volume days on the ES and major indices.
I fired my trading station and was quite surprised: the order book levels of the ES seem very thin. Usually under 100 contracts per level.
Thus the price seems very volatile a bit like the NQ is.
Is it my memory, or is the orderbook of the ES much thinner than it used to be, even only a month ago?
If yes why? I would have expected with increased volume of those days, much thicker order book levels. Are traders ine holiday?
Can you help answer these questions from other members on NexusFi?
You are right, this kind of volatility started last Monday, as the huge sell-off began, it has to do with the corona spread and I would call it "corona panic"
Have you looked at a chart for the ES for the past week? Or even listened to the news and heard that many world markets dropped by at least 10% last week, predominantly based on fears that a Coronavirus pandemic could lead to a global growth/production output/spending slowdown, market sentiment switched over a weekend from very bullish to very bearish with waves of panic selling.
You don't think that might have had something to do with it, rather than wondering whether traders are on holiday?
You do not win as a trader, you just get to play again the next day. If that game doesn’t appeal to you then you should not trade. Gary Norden
Precisely.
With more volume, more panic, I would have expected THICKER order book levels because of increased participation.
More volume, more activity, more trades.... then why thinner book levels?
The increased volatility is a consequence of less volume, not more. Think about it, everyone is panicking. The risk is much, much higher. Institutions that were moving certain amount of volume in a calm market will pull their size to protect themselves against an increased level of uncertainty.
This also means that if they need to get out of a positions or enter a new one, and the volume to match their size is not there, they will move the market against themselves at a higher loss or at worst prices than they are willing to pay by a much larger margin than they would with a market on normal volume.
I do agree, but actually there is MORE volume since the phenomenon has started, not less. So we have increased volatility on increased volume and thinner order book.
I still can't reason why. Someone mentioned less friction. Not exactly sure what he meant.
Volume and volatility (which can be measured different ways) go hand in hand. A study of daily volume vs daily range (as a metric of volatility, for example) will confirm a pretty strong correlation, regardless of the sample. Which one is causal is not an easy question, and the answer is not really important in this context -- the bottom line is that when volatility increases, it is accompanied by an increase volume.
The order book is normally largely comprised of firms which function as market makers, whether officially or not. That is, they place orders in the book and in a "normal" market their automated systems (written by very smart people with lots of degrees) will buy and sell for a tick or two or three (in equities, a penny/subpenny/etc). They provide liquidity to the market. In equities, for example, the exchange provides a rebate for adding liquidity vs taking liquidity (see EDGX as an example).
When the market is volatile, there is less incentive to add liquidity, as their margins are small, and their ability to make money diminishes greatly if the market moves quickly and they take a loss. If you make a tick per trade, you can't afford to lose much when you lose. So, they pull out, and as they collectively pull out, the book becomes thin.
In the old days (when I first started trading futures, which was in 2010), I remember the ES book was much thicker. Check out the attached image I found of a DOM from early 2011 -- you have not seen them stacked 3000s for quite some time. So for me, to see the "normal" depths these days of less than 1000 still takes some getting used to, much less how it is during volatile times.
Still, consider that the ES book is the thickest (equities) in the world. Trading something like NQ is pure insanity. The FESX book is quite good still, but also consider that it moves one point at a time while the ES moves 1/4 of a point so it has effectively less liquidity per change in price.
Thank you for your answer.
This picture old order book picture of the ES is very interesting. One of the reason of the thinning of the order book could be also due to the fact that the price of the ES is also 3x what it used to be. Or is it unrelated?
I understand your reasoning about volume and range.
What you say also about the algos avoiding volatile condition makes sense.
So if what I understand is correct, it's more volatile for 2 reasons: more volume, thinner book. So it's easier for this increased volume to sweep the levels of order book.
In a nutshell: less limit orders, but more market orders (volume).
Makes sense.
