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*Please Note: I am looking for opinions from experienced traders, not noobs (like me) who may or may not be sore about how their broker is out to get them. I want an objective discussion if possible. Thanks.*
I hear a lot of accusations of Market Makers "stop hunting", trading against clients, and generally not respecting limit order prices. However, I have never understood HOW exactly Market Makers can accomplish price manipulation for their own gain.
Is there a person sitting behind a desk with a bid/ask knob that is creating the price movement in their favor or deliberately moving the bid/ask to take out your stops? If this is the case, then that would imply that different Market Makers will be giving completely separate quotes for the same instrument. If I pull up 5 minute charts from, say, Gain Capital and TradeStation, could I expect to see two completely different charts as each Market Maker cranks their bid/ask knob in their best interest?
I know that the example is silly, but the question is very serious. I need to know if stop hunting is a tin foil hat theory developed by losing traders or if I should seriously consider going with an ECN; and is an ECN the solution to this problem? If stop hunting and such are very true, is there any way a trader can avoid it? I don't want to play the victim role without fully understanding what's going on here.
Your input is appreciated
Thanks
Can you help answer these questions from other members on NexusFi?
Thanks for the input (: My experience is US Stocks & Forex, so those are the markets I'm mainly concerned about here.
- Stop running is real - Again, how is it accomplished by the broker? Until someone can articulate this, it's fiction, not fact.
- Can't do anything about it? I've heard that using an ECN will solve the issue. Thoughts on that?
- Decipher the build up. My way of doing this is to set a decent stop below where I think stop running might reach. That's more of art than science, but get's me by.
But not the Market-Makers are stop running, the big guys do this and regarding quotes, the data comes from the exchange and not from a Market-Maker (like it is in Forex), each futures-platform shows the same bid/ask size, there is no difference from one broker to another.
Oh sorry, I'm talking Futures (your post was not live)
Not necessary the broker is doing stop run, stop run is done by any party that thinks, if they can move
the price to level X, they only need a volume of Y and they will buy or sell, at an interesting price-level,
if stops to the low -> they buy, if stops to the high -> they sell
The skills requires : estimate how much volume is needed to get there, estimate what resting stop
orders are at those levels
If not enough muscle power, they collude with other parties
I'm talking on a central system like futures. In case of equities it's even different, because one of the
exchanges can be thin and if the arbitrage algo's are not running, the price can move without the other
market moving.
In case of Forex, as this is not regulated, this is more easy to manipulate, but if the broker is moving
the price too far from the market, that would not really be legal i think.
taking the other side of the trade, and not disclose it, i think there have been cases on that (FXCM
don't remember exaclty...
On a basic level with a non ecn it works like this (and even some that say they are ecn but it's bs)
When you place a trade it's on their system not into an exchange. You place a stop. They know where you placed the trade. They know where your stop is.
They then hedge by placing orders into the actual fx market to cover themselves against any potential loss (or so they say)
But they might trade against you if they want.
They can widen the spread to whatever they want whenever they want.
They also have the ability to filter all your orders and choose to execute them or not. This is either done by an algorithm or by a human.
Is this hearsay by losing traders? No, but it's a good excuse!
Yes, stop hunting is very real. However, the entire market is hunting for all stops. It is basically liquidity hunting. It is not personal, however. It is every single trader.
It absolutely happens, and I would argue that it's just the nature of the markets. I watch the 6J while I trade treasuries, and I've noticed that 6's can go against the cumulative delta / order flow for long periods of time. I theorize that this may be because the futures in the 6's are not the most influential market for currencies, inter-bank transactions are. So the large players that might keep price in line aren't there, and market makers can move it to where they want.
However, I've also seen it in treasuries on trend days. The market won't take the next leg until the market maker can convince enough people to fade the move.
Indicators like Cumulative Delta, Cumulative Delta Difference, and Commitment of Traders can be helpful here. GOMI has some good indicators in this direction, although you can easily write your own in NT8. You can see how many lots it typically takes to make something happen. You can also see how many are on each side of the market. Often the market maker will just go right after whichever side is bigger. Also keep an eye on the dom. If there's a lot of liquidity being offered despite velocity of trade being low, that's a good condition we're in that kind of action. Traders aren't as confident that they can get what they need with market orders, so there's more people in the queue.
