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Do exchanges purposely delay market order trades to give the trader the worst possible fills?
I ask this question because while watching price on relatively short time frames (1 minute or less) it seems like a large impulse of volume comes in immediately prior to a move in the reverse direction. I know someone is going to say, “No, that would be illegal.” But, I would still like to hear your opinion. Perhaps it is not the exchange, perhaps it is the Axe (largest market maker).
Can you help answer these questions from other members on NexusFi?
Sometimes it feels like that...but NO they are not. Spikes in Volume are most always just institutions getting their limit orders (iceberg Orders) filled. Without MBO data these are not obvious to track...but with a trained eye, you can get a good guess as to when they happen.
Example:
NQ Icebergs for 9.1.2021
NQ Iceburg Orders 9.2.2021
Look at the ranges...They took place in about a second!
Not fun when you are in the opposite direction than the institutions. Been there done that...LOL.
It's unlikely there's a delay to institutional and latency-sensitive professional traders since they all pay to be colocated with the matching engines and many use the same/similar infrastructure to route cross-country. Even the length of the cross-connects within Aurora is the same.
There may be meaningful latency to your house, but not enough to explain the phenomena you're describing. My view is a combination of the following occurs when large market orders are executed:
Supply/Demand: Order book liquidity is absorbed at the first few prices if it's a large order
Repricing: MMs/HFT/Traders who got taken out in the initial wave or were further back in the limit order book reprice lower/higher. This is normal since no one wants to be run over. Some may have blown through stops and now have to exit.
Algos: Algos detect the price & volume and move to buy/sell based on their logic. If things don't go their way, they stop out - further adding to the mix of orders.
Arbitrage: Cross-asset arb and Stat arb algos kick in. If it's a contract like ES and cash equities are open, they'll arb with cash equities. Stat arb may look at a basket of securities to spread risk to.
Opportunistic & Hidden liquidity: Folks move in to buy/sell.
Etc Etc Etc.
There can be any number of triggers for the order itself - big moves in cash equites, big options trades etc. The follow-on impacts from those have to play out too.
A lot of this is occurring on microsecond and millisecond timescales. So it may seem like it's manipulative or bizarre but I think it's more just multiple simultaneous phenomena. It's also, unfortunately, not predictable with certainty. Sometimes the price reverts and sometimes it keeps going.
Note that this applies to the larger markets - ES, NQ, Treasuries etc. Smaller markets are more idiosyncratic. The larger markets are extremely competitive and capital is cheap, so it's very unlikely any MM/HFT could push anything around for long.
I can understand that volume at price might be high due to limit order support or resistance, but I have observed many, many, times that a very large spike in market orders occur in the volume immediately prior to a reversal or pullback. If the previous trend is upward then there will be a very large spike in buy market orders immediately before a limit order push down. It might just be my imagination but it seems like somebody is throttling (like the accelerator on a car) the flow of market orders so they get the worst possible fill. It is kind of like taking a trowel of mud and slapping it on a wall, all in an instant of time. Color me paranoid but it feels like market manipulation.
I'd add; It's a FIFO (first in, First OUT) order matching system. The FIFO algorithm uses price and time as the only criteria for filling an order.
Also, there are penalties for trying to manipulate the market by placing and cancelling orders without intent to execute ("spoofing") within a specific short time frame among a few other potentially manipulative actions. See rule 575.
"I have observed many, many, times that a very large spike in market orders occur in the volume immediately prior to a reversal or pullback."
What you're describing is a phenomena that's been happening as far back as I can remember in ES.
Though this can have several causes, one thing not mentioned is that in the very short time frames intraday, it could be the the person who caused the reversal was simply making a market for their large order.
In other words: "Buying 500 to sell a 1000".
Literally happens all the time.
Could also be a arb activity caused by sudden large options hedge or other non directional options flow.