Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Are arrangements between large participants causing high volume balances zones?
Real information from real, large trading desks are rare.
Considering the volume profile theory, and more specifically Volume profile analysis and the formation of high volume nodes, also called balance areas... would it make sense to think that those large participants with huge orders agree on a zone with a counter party to exchange contracts?
Let's say a large participants has 10 000 contracts of ES to buy... I can't even imagine they would not call other trading desks to find someone with 10 000+ contract to sell, so they can deal on a defined area to minimize price fluctuation. Win / Win arrangements.
Unless mistaken, this is not forbidden, and I can't imagine that large participants go into these kind of arrangements for most, if not each and every of their large orders when there is no urgency.
Has anyone with experience in professional trading desks at banks, edge funds... confirm this is happening on a regular basis?
That would be the only way to explain the formation of balance areas, and any credibility that they would deserve.
I've just finished reading the Scott Patterson book 'Dark Pools' (a good read, but not quite as good as 'The Quants'!), which mostly focuses on the way in which these relate to equity trading, although there is a brief mention of HFT …
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,207
@brakkar while I don't have institutional experience in equities I do have it in the energy markets. The "Over The Counter" or "OTC" market is large - at least in energies. It is an ever evolving market though, and is significantly different post-Dodd Frank than it was pre-. Most of the OTC markets I am aware of generally fall into one of a few categories that aren't ideally suited for exchange orders.
1/ Long Dated Transactions. Products like Calendar Year 2025 are quoted and traded regularly OTC and then cleared on exchange
2/ Inter-exchange spreads. For example NYMEX vs ICE.
3/ Large and or complicated Option structures.
There used to be a lot more large block trades on outrights or spreads (Whats the market on 500 CLG1 or 1000 HGH2/J2 Spreads?) but this seems to happen less and less. I don't know whether this is due to Dodd Frank (lot less Bank Market Makers, offset by a lot more funds, who don't warehouse risk in the way a Bank did) or just that it's a lot easier to execute orders like that on exchange.
With regards to Dark Pools, these are for equities and not for futures. I think of them as un-regulated exchanges for large share blocks.
I have no knowledge of these kinds of trades, nor about dark pools or how these trades are negotiated. I don't think I'm alone in this.
So I don't know if this idea is right or not, either. I suppose it might be. But I also don't see this as "the only way to explain the formation of balance areas" either.
For example, standard market profile theory (which doesn't have to be right, either, of course) says that, when the markets are in balance, traders have a common assessment of what is a fair price, and so their trading tends to move price back toward that level -- if price trades above it, sellers are willing to come in because they think it has gotten too high and will decline; if price trades below it, buyers come in for a similar reason: price has gotten too low and will recover upward. Price will move above or below this level and not come back once the common assessment of the players has changed, or when "other timeframe" traders (traders with a different perspective who are not part of the existing assessment) come in and act differently from the prior consensus. (Usually thought to be institutions putting on long-term investment positions, but it could anyone, really, who has a different motivation and the bucks to matter.)
I'm not saying this is the right explanation, just that it's the usual one. I also don't think it is entirely incompatible with the idea that big players have colluded -- if they have, that's part of what makes a given price the commonly-agreed value.
I would say, more importantly, does it matter? Once it's observed that buyers will come in below a certain level and sellers above, whatever the reasons, that's the balance area. If there is a way to exploit the big-player agreement hypothesis, that would make it much more interesting and relevant to trading. As it is, I think it's possible, but not the only one, and not one that clearly can be acted on.
Just my take, and not meant to shoot down the idea. I would not be surprised to find that there are many reasons why a given area gets to have some agreement, and also why it changes, as it always does eventually.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
I'm going to use a very simple example. Suppose that every second someone is buying 1 ES and there's always 1 resting limit order to fill the buyer. I want to buy 10 lots and you agree to sell 10 lots to me at the exact moment I buy as we had a secret phone call and we're each other's counter party. How would a price chart look?
Now imagine that I want to sell those 10 lots and there's no other sellers.
Now suppose that I only have 5 lots, someone is buying 1 ES every second, but someone is also selling 1ES every other second.
You rarely if ever see example 1, which indicates that the secret counterparty phenomenon is not something common place in the futures market. If we already agreed to be each other's counterparty, why would we wait to get our orders filled on the open market and expose our positions to other traders? We would just straight up exchange contracts immediately. Instead, you often see some form of example 3. Volume profile is essentially lifting the hood on a standard time/price chart and letting you "confirm" support and resistance by seeing where the big bois are transacting because that's all support and resistance is: big bois buying or selling at an area (or lack of interest in the case of a LVN). A reason why balance is a region and not a single price level is because if it was so clear where the big boi was trading.. everyone would just frontrun him. This is what happened back in the olden days b4 algorithms took over order execution. So instead, the big boi is looking for an average price and the execution algorithms do the heavy lifting of delivering that average price
