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Resting bids above market or offers below market?
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Resting bids above market or offers below market?

  #1 (permalink)
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Resting bids above market or offers below market?

I have been think about something. Why cannot traders put in resting bid orders above the market and sell offers below the market? I know how limit/market orders work. However, you could in theory have an off book queue that would only move the orders to active state when the market moved above or below them.

The question is relevant because/in relation to another question. Let's say the market is moving up. I want my bid to obtain top of queue. If I had a server at the exchange how would I program my orders to get the top of book?

If you supported off book (side book) queue then it would mitigate some of the advantage of HFT, I'm thinking. Because, you could possibly code similar strategies without needing special access.

If I try to submit a limit in advance then of course it gets rejected which is the normal behavior. That's normally correct behavior. But, let's say I want to fill the depth as soon as possible, could I just hit the server with messages to insert my orders or is there some more efficient way.

There are two scenarios where we can imagine we have opportunity to get top of book. If we put our orders in well in advance or far off market or if we backfill the orders as they move up or down. We cannot get top of book on anything but the first level because we know that other market makers will have inventory on the next levels.

So the mechanics of the "backfill" or refill are important. If all the market makers have HFT at the exchange and backfill aggressively then we can imagine the orders will arrive at same time.


Last edited by tpredictor; October 27th, 2017 at 08:22 PM.
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  #3 (permalink)
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Right, primarily the idea has came to me from market making on BTC with very small test account. I'm doing it manually and having to place hundreds of trades. There are definitely some interesting dynamics when the market moves. I have put in above the market with resting order and tried to hit the button immediately. Curiously, I was able to near the top book or level but then what was interesting is without even any trades, the book was able to fill above me as new orders were placed in front of mine. This obviously would be less likely to happen in the futures.

It would only give you one side though, of course. You would still have to the other side unless you kept those open and only canceled the side you didnt need.

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tpredictor View Post
I have been think about something. Why cannot traders put in resting bid orders above the market and sell offers below the market? I know how limit/market orders work. However, you could in theory have an off book queue that would only move the orders to active state when the market moved above or below them.





This is called a stop limit order.


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Essentially if you are trying to be first in the queue at a newly created level or just in general, there are many players that are already doing this. ES fills to 100 size within 40 micros almost every time a new level is in. The first ones in are still much faster. I don't think it's advisable to fight that battle.

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If you put a bid above the market, you are saying you'd like to bid at a higher price than at market.

So market inside bid price is 10 and the offer is 11 but you want bid 15.

The market exists to match buyers and sellers. Seeing as how pretty much every seller at 15 or below would be very happy to fill your limit order at 15, the market very kindly fills you against the best offer available - at 11.

So you are more than welcome to put limit orders above market but you'll get matched with a seller immediately.

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tpredictor View Post
However, you could in theory have an off book queue that would only move the orders to active state when the market moved above or below them.

As @addchild said, this is called a stop limit order.

The order has a stop price and a limit price and is off book when created.

When the stop price is touched, the order is moved to the book and becomes a regular limit order.

A stop limit buy order can only be set above the market (last traded price).

A stop limit sell order can only be set below the market (last traded price).

All major exchanges - including CME - offer stop limit orders.

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Yeah I thought of a stop limit order. Some exchanges support also peg orders but the question is more about, also, the dynamics that determine who gets the top of book when a level clears. The question is relevant for example in a few scenarios:

You are market making on an exchange that charges some sort of basis point for market orders but the spread is tight. If you get top of book then you can avoid the charges and/or do more volume. For example, on GDAX if I did my calculations correctly you pay $14.53 for a market order per 1 BTC/USD at current prices. This means if you can backfill a move in under $14.53 then it is cheaper to use a limit order even if you have to pay up.

You want to obtain top of book on a new cleared level in the futures. This will give you the ability to hit out into the orders that fill behind you for a low risk/scalp trade and/or do more volume, as well.

You want to chase or aggressively market make a rising move.


Last edited by tpredictor; October 28th, 2017 at 06:35 AM.
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tpredictor View Post
Yeah I thought of a stop limit order. Some exchanges support also peg orders but the question is more about, also, the dynamics that determine who gets the top of book when a level clears. .

Whoever physically enters the order first. i.e the fastest.

A simple idea( that i got from prop) is that you place a marketable limit order to buy at the ask price, or sell at the bid, because, HFT own the spread and will always get to the front of the queue. Therefore, your passive limit order to buy at the bid, or passive limit order to sell at the ask will only typically get filled if price trades through( so the trade has usually gone against you before you are fully filled) Placing a marketable limit order you take all that is available at the bid/ask and then you're remaining order goes to the front of the queue. So you are for the most part a liquidity taker, not a provider.

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I still have not heard the precise mechanics that matter. I'm sure this can vary from product to product and exchange to exchange but what we're trying to get at is precisely how a new level is filled.

There are a few possibilities

1. The exchange processes a resting dark limit order pool, the stop limits first in fifo order
2. Next the exchange processes any submitted orders, i.e. low latency


If (1) is the case, do we know if the HFT are stacking the "dark" book as well with orders? I think a stop limit will still be slower because remember after the depth is cleared then the market doesn't need to trade at a higher level before the depth is filled. So, I'm thinking there is truly not a queue for latent side buy/sell capacity. But, if there were then notice it would level the playing field.

Here is what I think happens in something like the es, the market is moving up.

1. The offers clear. The spread widens by 1 tick but we do not see this.
2. HFT traders will submit new limit orders to fill the book in microseconds perhaps using peg orders ? or just using HFT software.
3. A trade triggers on the ask side.
4. Stop limits are processed in FIFO order after the HFT traders have filled the book.

With something BTC/USD here is what happens:

1. The offer clears. The spread widens to multiple cents usually
2. Traders will start to fill the levels closest to the bid.
3. Other more aggressive HFT traders will see the new fills and start to fill levels in front of them.
4. The spread will narrow to the minimum spread of 1 cent in most cases within moments.


Last edited by tpredictor; October 28th, 2017 at 10:10 AM.
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