Late to the discussion... Here are some stuff I heard and learned from people or place quoted:
a) There is a tape pattern which is (large) size bid/size ask being "revisited" again and again are meant to be taken (trade thru). Personally I think there is some truth to this watching the tape. (bano)
b) There is also a totally opposite school of thought is to step in front of size but get out when decrement quickly. (stophunter)
c) Another school of thought thinks that (b) is a newbie play because institutions would never show their hands however they might if they are at the last piece of their order. (tape reading thread at ET... might be good to post this question to Maverick74)
d) The idea of liquidity vacuum explained by Peter at jigsawtrading (DT).
These are my wild guess but I thought about this problem sometimes:
Say it is showing a huge limit order at some underlying bid.
1) if it is indeed the last piece of an institutional buy order (done their job), wouldn't it be advantageous to take the last major piece of the demand out... last man standing? And if it turns out to be a fake bid, even better.
2) if (1) is true or just in general people thinks that price trades toward size, wouldn't that make people more likely to pull their underlying bids out in front of the large bid (who wants to buy at worse price?) Kind of a self-fulfilling prophesy.
3) It might be partly due to psychological comfort. If prudent buyers or cheap bastards trying to lean on the large bid, it creates a kind of air pocket because more bids will be moved just in front of the large bid which makes the top light and bottom heavy on the ladder. This makes the price move down faster and that sheer momentum might make the buyers have second thoughts (pull limit order or new buyers not entering) and seller more confident.
4) This one is a bit of a stretch... Also some buyers AND sellers might want to wait out to see how price react to the large limit order, this also thin out the liquidity on the buy side a bit meanwhile the sell side liquidity are only above the best bid... this too helps create some kind of air pocket?
Last edited by cook; November 21st, 2012 at 11:55 PM.
The following user says Thank You to cook for this post:
Yeah and I've seen the spoofer get smashed too, then the price blasts through that level...
You were very right when you told me that the DAX and CL are similar, especially the way several levels will be taken out very quickly in one swoop. The bergs are much smaller too. You've got to be nimble trading these markets...very similar thin markets...