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What if someone sells 10 000 NQ contracts with an iceberg order....
Let's take the hypothetical (or not so hypothetical) scenario that a large trader has 10 000 contracts of Nasdaq Emini NQ to sell.
He puts an iceberg order at a level, let's say 11 000. The order is reloaded endlessly until the 10000 contracts are sold.
This of course, will stop the price from going up.
But what will happen? Since the future is correlated to the real index, and if the stocks composing the index decide to move up.... then what will happen?
Will there be a divergence between the index (going up) and the future staying stuck?
I know such a trader will not just sit on such a large order... it's a hypothetical scenario to better understand the mechanics of all of this.
More accurately, will delay the price from going up. Once it is clear what you are doing the game becomes seeing who will be the first to trip your 10,000 contract stop loss orders. Spamming 100 contract market buy orders will get it done pretty quickly.
So it's possible for the future quotation to diverge from the underlying index because of large orders and stop hunts?
Then who is going to catch up to sync? The future, or the index trough composing stocks of the index?
If there is any significant difference, the arbitrageurs will simply buy the one that is low and sell the one that is high. (You can't buy the index, but you can buy/sell a basket of stocks that moves closely enough with the index for it to be essentially the same thing.)
These buys and sells will very quickly bring the futures and the index back into synch. This is done every day, with any market or market vehicle. The arbs just need to have two things that can get out of step, but that are actually equivalent or near-equivalent, and they're off to the races.
If this sort of thing didn't happen, then the stock index futures market wouldn't track the stock market, and so would not be able to function as a way to hedge large stock positions, which is essentially what the ES, NQ, YM, etc. are for.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Algos that arb would make sure that if 1 participant is soaking the bid...they would take the other side in order to keep the futures moving in step with the actual index of stocks. A delay in rising price would make sense, as we know icebergs alone can't artificially hold price for that long.
What I've seen a lot on YM is pulling of icebergs. It's hard for my setup to accurately find them, but when I do, sometimes they are pulled and then it's useless. I can tell that whoever is using them, is pulling them on purpose to let the market slide one way. Pulling them causes a nice chain reaction though...I suspect they may do this to get people on the wrong side too, because they know retail is also watching for icebergs. It's like saying, "Hey everyone, just announcing I have an iceberg on the bid at a major intraday support, don't mind me, just loading up tons of contracts - whoops changed my mind, I'll take liquidity and sell at market LOL" and slam we are all on the wrong side.
10,000 contracts sounds like a lot to us, but really a few larger participants could squeeze you to stop out. But it might take a few moments to find someone to step up and swing the bat. I recall a slow moment with 63 contracts on YM being sold near resistance. It wasn't an iceberg, but it took several touches before anyone would take the big remaining chunk. So each time it would reject, I bought 1 or 2 mini's until I decided I'd just take a chunk of 8. It helps to set off more buying as well...in thin markets that is. When it's thin and slow, you can help push price so long as it fits the bigger picture and the actions of other traders as well. It was kinda weird seeing a bigger order just sitting there 100% visible and not being pulled.
Thank you for your answers.
The reason I was asking this, is because I asked myself if It was not better to trade commodities futures than stock indexes, as I suspected the supply / demand game flow was more genuine in commodities (metals, foods....).
Indeed, I was thinking of what's the point in trading, support / resistance breakouts / fading, icebergs, trapped buyers and sellers on stock index futures, if that future is arbitraged to follow an index composed of stocks that may disregard patterns and flow of the future at a particular moment.
However, from what I observed, and successful stock index futures traders I know, it seems some technical analysis patterns and order flow behavior do happen in stock indexes futures also. After all, when there is a strong trend on stock index future, there definitely is more agressive buyers than sellers. It still is quite confusing to really understand how this little world operates and if one is not trying to read patterns in the clouds.
You should understand that arbitrage ties both the stock index and the stock index futures together very tightly, and that the relationship is on both sides. It's not that the index is in charge and forces the futures to follow. Whatever price change happens in one is quickly going to happen in the other, which is what the arbitrage guarantees, and it goes in both directions. If you think of it the other way, that the stock index is independent and the futures are totally dependent, you are going to drive yourself crazy, because you will be thinking that nothing that happens on the futures side matters -- against the evidence that you can simply trade the futures without any reference to the stock indices, as most futures traders do.
Because of the huge amount of money involved in large stock holders hedging their portfolios with futures, there is more than enough buying and selling power that can be brought to bear on both sides to force them essentially into lockstep. You can trade either without reference to the other, and successful futures traders generally do.
You can also use one as a proxy for the other, which some also do. And you can use fundamental or economic factors (or technical factors or analyses for that matter) affecting the stock side to help your trading on the futures side, if these factors are part of your trading method. This is all due to the fact that the two sides will stay in very close synchronization, a fact you can rely on.
Yes.
But that's another question....
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
It is not realistic to think one can know with certainty who is doing what and why are they doing it. For example, the concept of "trapped buyers and sellers" is largely an illusion. An entity setting up a long term arb position can stop and hold price until they finish their business of selling futures contracts against buying a basket of the prime movers in an underlying index, at which point subsequent price moves are unlikely to have any effect on how they view their position. They are not "trapped" in any sense of the word. It might be helpful to consider that the larger the amount of money that is put at risk, say by an international bank, the more likely it is that they are relying on a very conservative strategy like arbitrage or hedging to limit the risk. These big players are not going to initiate a 10,000 contract position with the intention of scalping a point or two.
To the extent that it is true we cannot know the who and why behind market moves and surmise what this means for the near future, it is equally true that possessing this knowledge is not necessary and should not be of concern.
We and our trading peers are not likely moving price in any significant way other than a momentary tick or two when a stop gets hit. ( Well maybe Bob West does ). We are the remora in a sea of sharks and whales snatching what we can through understanding with the aid of charts the behavior of the larger players. These past 5 trading days the NQ has ranged @ $5,000 between 5:30 and 11:30 CMT. The who and the why of those swings does not matter whereas recognizing what price is doing so that we can insert ourselves into that flow of money is where ( to stretch a metaphor ) we must swim.
Today there was probably 10,000 contracts sold in the index futures, if not more, around 2:38pm ET. It was such a dire need to sell those contracts that the market dropped from the high to weekly low, very quickly. In DOW futures, we are talking 600 points in under 30 minutes.
If someone had an iceberg order to sell around this time, it should've been broken up to execute all day long at several price points and to "slice up" the order. The second you tip your hand? Someone will sell that 10,000 at market and beat you to it!
This was a panic sell for sure, so "they" did not bother setting up an iceberg, because someone would beat them to the punch on selling. Right before that panic sell was a small iceberg on the bid. If you're going to panic sell, it's best to execute that panic sell into SOME demand, granted there wasn't enough and then bids get pulled instantly when it dumps, so nobody is there to provide liquidity.
Today was not a normal day. Trump's Tweet alone caused a cascade of violent selling. A minute after the tweet was when the selling hit. It usually isn't that clear-cut, but today it was.
Edit: There are also instances of not enough market-takers to hit INTO your iceberg. If people stop buying at market, then your iceberg on the offer isn't going to fill right away or may never fully fill.... But you can flip that Ice into a market sell if it's really necessary...
). We are the remora in a sea of sharks and whales snatching what we can through understanding with the aid of charts the behavior of the larger players. These past 5 trading days the NQ has ranged @ $5,000 between 5:30 and 11:30 CMT. The who and the why of those swings does not matter whereas recognizing what price is doing so that we can insert ourselves into that flow of money is where ( to stretch a metaphor ) we must swim.