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Attached is a useful summary graphic showing the Six Primary Strategies of High Frequency Trading (HFT) firms. Note the inside two 'Trading the Tape' which focus on tape itself, but the other four strategies affect our tape reading too of course - particularly the Rebate Trading and Market Making.
Courtesy of t3live.com site where you can enrol for USD25k HFT courses!
Rocky, I think DT clearly stated that DOM/tape action which is hard to explain could be the stat/arb or hedge traders.
Your picture shows price and volume relations. Usually big volumes signal the end of the move and exits by smart money. All reversal patterns have some common properties:
1. Exits - big volume, big candles, usually at some important and visible S/R lvl.
2. Accumulation - consolidation-type price action with small volume (big boys don't want you to know that the're accumulating position)
3. Breakout and stop-runs - this is where the move starts - big money run stops of smaller traders, these stops help to fuel the further move.
Your picture is a textbook example of a reversal behavior:
1. Massive selling at the support - exits of smart money against short sellers and breakout traders.
2. Consolidation 5630-5638 aprox till 11:24 on your chart - accumulation of a position by big boys.
3. At around 11:24 breakout happens, we see relatively big buy volume - these are stops of people who shorted the market within the consolidation defined.
4. Retest of the high of consolidation with a volume spike and further continuation of an uptrend.
Bloom, this is the question that interests me as well. I have a friend who worked in GS as a sales and he knows some traders there, based on his stories of how they do it I can tell you following:
1. They don't use charts and do not trade manually using orderbook/tape. All the scalping is performed by algos. They do say scalping is a way to get going for retail traders, but it is very-very challenging, given the fact that we have to compete against algos.
2. They utilize longer-term arbitrage strategies when they see big divergences between the correlated instruments, and by big I mean not 4-5 ticks but rather 200-300 ticks, so they could be in an arb position for quite a long time - up to several month.
3. When they enter big, they don't care about the best price and can move price fairly easy against them up to several points.
4. Basically nobody there is doing "set R/R = 3 and risk 1% of one's capital" bullshit. They're constantly in the market and are constantly making money using the wide variety of available instruments.
5. They sell options.
Again, I don't know to what extent all this is true, but it seems to make sense to me.
I have many friends here in Russia who working inside of this business
I tell you - We have a same things here )))
I know guys who are doing ARB and options, i know guys who working on the order or trader desk )))
What is a traders work? You seating at your desk. Rings phone and you here voice of your manager - I need 6 000 futures S&P500 right now. Ok. What you are doing next? You buy 6000 futures and in the same moment selling stocks or another futures. If you need 120 000 dollars to long 6 000 futures, than you must sell another instrument on 120 000 dollars. You made an ARB hedge. maybe there will be another ratio between money in long and short. But you are always hedging. What the reason? 1) Comission rebates 2) You are opening position for some of yours clients
For what reasons you need charts? I do not see any reason)))
Than you see how other guys traders doing positions for other clients you do not need charts)))
Someone buys 6000 fut from Moscow
Someone buys 120000 from Hong Kong and so on and on and on )))
And i know a guy from City bank. He was a trader there 3 years. And he tells me about a tape)) And show some magick ))) What do you think. Where actual HE IS had study a tape? )))) So some different guys doing some different things ))) I know such fonds exist and they cut a SL of retail traders. This is small fonds. For ex
investors gave you 100 mln dollars. 90 mln you buy treasury ))) Fixed % 10%. 9 mln dollars )))
And you have 9 mln dollars you can give for some small HF and they will do a scalp for you with pleasure)))
The thing I see here is that no one wants to buy 17.50 - and no one wants to sell the 16.75 level - just watch - it happens over and over againg - The result is that the price is "trapped" in a two tick range. Quite funny actually I read this as a prime example of the sheep not knowing where to go - Everybody is waiting for someone with some money to make a move. I would wait for a decisive move in either direction, and trade the pullback.
Of course, not all traders are day traders. I know a guy that ran a team of traders in Singapore, for a Canadian bank strangely enough. They were quite exotic - larger barrier options and the like.
He retired at 32 years old.
They were also more long term and of course would not have been staring at a DOM/Time & Sales.
If you look at prop shops - that's where you see them using the DOM to piggy back the trades of the guys at GS you were talking about.
I read this as a prime example of the sheep not knowing where to go - Everybody is waiting for someone with some money to make a move. I would wait for a decisive move in either direction, and trade the 
