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Why does the market move towards the heavier side of the order book?
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Why does the market move towards the heavier side of the order book?

  #1 (permalink)
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Why does the market move towards the heavier side of the order book?

Someone said to me recently:


Quoting 
Remember, the market moves TOWARD size in the order book. Contrary to popular belief and common sense. For example, if there are more offers in the book than bids, it is most likely going to probe higher to test that size. The market is create to do business in the most efficient way possible (getting off large size). This is why the market moves towards size.

I have observed that this tends to be the case as well, though I don't pretend to know how to use the DOM effectively to trade. Do you agree? And if so, why is it the case the the side with more orders tends to draw price to it? While spoofing occurs all the time, I'm assuming a relatively spoof-free environment for the sake of this discussion, although if spoofing is simply part of the equation of why this works, then please I'd love to hear your thoughts on it too.

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  #3 (permalink)
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Well, a lot of spoofing goes on and generally that involves stacking the order book on one side to fool people into trading in the other direction. At the same time they will be putting in an icebergs on the opposite side to scoop up the trades of the fooled traders. Then the size will flip to the other side, those fooled traders will be trapped and price will move through that large size as they exit.

Then again, there are times when the order book will just naturally be stacked higher on one side. At the high of the day it is normal for the offer to be much larger than the bid and vice-versa. This does not however mean that price is going to break higher.

Sometimes it's real, sometimes it isn't. Sometimes there's a big fish gaming other players and sometimes a bigger fish comes along and eats him.

Basically, it's a game. A game that requires particularly large 'spheres'.

So - you are on the right track, there's just a lot of games being played. There's also some attempts to make algo's jump. You will occasionally see (on the ES) the order book flash up 6000 or so on a level and then it'll disappear again. That's not there to make you & me react, it's there to fool the algos.

As well as the order book, the time and sales is needed too. The DOM is a statement of intent, the Time & Sales represent actual trades (against that intent). So - combine the two and you have a good toolset to assess the gameplay.

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Thanks DT for the info--anyone else have thoughts, I'd think some of you "order flow traders" would have plenty to say about this!

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bid = demand
ask = supply

when there is more supply than demand, price moves down.
when there is more demand than supply, price moves up.

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Massive l View Post
bid = demand
ask = supply

when there is more supply than demand, price moves down.
when there is more demand than supply, price moves up.

Please children - do NOT try this at home.

Seriously - we'd all be brazillianaires if the DOM could be interpreted this way.

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No we wouldn't. There's much more to the game than that.

I'm just saying...eg When the bid has 16 and the ask has 1, the bid will get hit as there is more demand.

I'm not this type of trader but I've seen a few 1-2 tick traders base their trading off of that simple concept.

I personally go for the bigger moves and use order flow and t&s to time my entry.

btw - I like what you had to say. My response wasn't in response to you. In other words, I wasn't trying to downplay your response.

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Massive l View Post
I'm just saying...eg When the bid has 16 and the ask has 1, the bid will get hit as there is more demand.

But the demand you talk about (16 on the bid) is passive demand. Demand shows itself, IMO anyway, as active buyers, that is, market orders buying the offer. At the very least, in your example, is supply not stronger, as sellers aggressively unload (i.e., supply) to passive buyers?

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There was a lengthy discussion on this a few years back on ET started by a guy named Viper Speed Trader. He developed a strategy based on the cumulative volume of the first 5 levels of the orderbook on both sides (he referred to it as ACV). When he saw that one side of the orderbook was twice as large as the other, he would scalp toward the direction of the size. You might want to check out his thread for more details/examples (search for "VSTscalper" on ET).

Someone else created a indicator for him to plot the ratio of the cumulative bids vs. cumulative asks. You can see in this example that when price is moving down, the indicator (3rd panel) does in fact show that the cumulative bid volume (1st 5 levels) is twice as big as the cumulative ask volume (e.g., the reds bars are hitting "-2").
http://www.whitmarkdevelopment.com/projects/images/VST%20Indicators.jpg

After reading the ET thread a few years ago, I tried out the indicator for a few weeks, but ended up ditching it.

Not sure if this info helps your question, but just passing it along since I thought it was an interesting topic when I first came across it.


Last edited by Haverchuck; May 18th, 2011 at 04:35 PM.
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This site: OrderBookFX | Real-Time Forex Market Depth has some interesting material on this subject in their pdf users guide.

According to their explanation, price often trades towards size displayed on the smaller FX networks they supply data for, in response to movements on the larger networks such as Bloomberg, EBS, and Reuters. It would make sense for FX futures, which are quite small in volume compared to the large cash networks, to be used the same way.

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