Ok, this is getting pretty off topic. I should have said 'market making type' algos, not actual 'market makers'.
There are algos that spend a lot of time adding liquidity to both sides of the book, and they do exist in futures markets. These 'liquidity providers' provide a lot of low quality liquidity to the market. But when their book gets lopsided they become 'liquidity demanders' and drop their inventory and wait for a human execution trader to take a look.
Math. A gateway drug to reality.
Last edited by traderwerks; June 12th, 2011 at 05:36 AM.
At this point, I guess it is worth saying that it would seem that all the posts here seem to be opinions only, and are not first hand factual statements, and therefore may or may not be correct. I don't understand the concept of institutions defending a position either, I hear they build positions in chunks, and may allow the market to move against their position and add to that losing position to average down their entry price, but that is also an opinion. So, if you use any of these statements to make trading decisions, you are making decisions on opinions which may have little to do with reality. Always trust the source of your data before using it.
Institutions don't "defend" positions because there is not this one trader called "institutional trading" that gets a free pass to print money. If one firm tried to defend a price that didn't make sense there is no shortage of institutional sized money to punish them like anyone else, making the whole line of thought illogical. If someone likes a price though and thinks it makes sense to buy a dip then you can't really say they are "defending" as much as they perceive value.
Usually when this comes up I believe people are talking about a cascade of index arbitrage activity that you see on index futures.
actually, I am not stating an opinion, if I was I would have said "IMO" as I often do when it is an opinion...
@dutchbookmaker has stated it correctly ... institutional money is all about value, and also risk; they have more analysts focusing on finding value opportunities than most have access to; they also have models, that is what their algos execute for their own account, that take into account many different inputs from the market to express a view and as such build a position... those trading models are created by teams of quants within different areas of an institution (Equities & Derivatives, Fixed Income, etc).. also, know that any institutional position is always hedged.. they dont defend anything, they trade based on their models to express a view on the market... and losses are taken based on risk management (VaR, etc.) and are always defined from the start...
I mean given that I am right this presents an opportunity to subsequently reverse their trade after that one tick and profit a few ticks back in the other direction if they are the main driver of price and the stoploss cluster is calculated to be small. Given the resources, I'm sure they could give a statistical probability to know when It's safe to move the market based on other recent observable algo-trades.
Sometimes I think about the reoccurring daily shapes of the ES like the midday reversal or the lunch plateau and think how easy it would be to manipulate the market if large participants worked in unison at critical moments. Maybe they don't actually work together for legal reasons but they pick up on multiple iceberg trades and act similarly. It seems like they all unwind or reverse their positions at the end of an exhausted trend together. Maybe I am just going nuts from staring at charts but I figure 'why not?'
Last edited by sidney7g; June 12th, 2011 at 04:23 PM.
I'm not sure when large hedged positions based on models are entered or exited. Perhaps this is always done at 9:30 am, I have no idea. I'd assume It's most profitable to Dump money at planned critical moments. This also gives room for smaller firms and retail traders to ride the momentum.