Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
I've been quite successful scalping the E-Micros in the last year thanks to the heightened volatility.
While doing so i realized that i seem to know less about the product that i'm trading than i thought.
So here's what i'm wondering:
/ES futures track the index, right? So are they actually moving based on what the index components are doing or does the product trade like a stock through supply and demand with someone in the background making sure it stays on track?
I'm thinking of this example:
on average, the /ES has a volume of about 9k transactions per 5min.
So what if someone was to actually buy/sell 10k contracts at once?
Would that actually move the product (supply/demand)? Or would that person just not get filled and have to wait until there's enough buyers/sellers to fill those 10k contracts?
The reason why this is weird to me is because the product is a derivative, so its price is dependent on another product, right? So it can't be that one person 'moves the market' on that one 5min bar, right?
So will market makers step in and get that person filled?
Would be great to know.
Have you taken a look at a bid-ask/footprint chart while observing the ES? Or the DOM. Seeing those may help because then you can see how many contracts are actually trading back and forth at a level, or if stops are (presumably) being hit by aggressive orders. John Grady has a video explaining the DOM which might put this into perspective (see around 9 minutes in, in the video "Order flow basics - What is the DOM? Why is it useful? What do the numbers mean?"). But you can look at a 1 minute bid-ask/footprint chart and sometimes see big prints at a level that stand out amongst others. If I understand your question, it may depend if this huge buyer/seller is doing a market order or not. If it's a big market order, this big player can move the market on their own if they are buying/selling huge enough volumes. Like they will take out all the orders resting at 3000, 3000.25. 3000.50, etc. if it is a big enough order. But on the flipside, it could also play out that this big buyer or seller is just waiting at a certain price level, and buying up whatever comes to that level, via limit orders. Sometimes you'll see this when the market is moving up or down, but just can't past a certain level. In that case they aren't moving the market in the same way but still exerting an influence. Anyway not sure if I'm getting your question correctly but figured I'd reply with some info that may help.
After hours the index futures are implying an opening price for the cash market and trade side by side during regular hours, and like bobwest mentioned allow for hedging and arbitrage.
The mechanics of price and how it moves is based on the aggression of the buyers or the sellers. Your Best Bid is the highest price someone is willing to pay and everything below that are bids at lower prices which makes up the buy side book and conversely your Best Offer/Ask is the lowest price someone is willing to sell and everything above that are offers at higher prices which makes up the sell side book. If you're an aggressive buyer you go to where the sellers are at and start taking out the offers thus moving price higher. And if you're an aggressive seller you go where the buyers are at and take out the bids thus moving prices lower... Size matters! Big orders can move markets usually indicative of institutional and/or program.
>>...the product is a derivative, so its price is dependent on another product, right? So it can't be that one person 'moves the market' on that one 5min bar, right?
So will market makers step in and get that person filled? <<
In trading there are no absolutes. The relationship with the underlying is not linear but it is dynamic with premium expanding or contracting over time. And, it is IMO, misleading to assume the depth you can see gives you a complete and accurate enough picture of the state of the near market that you can know with certainty what will happen next. Or, to know who is doing what and why are they doing it. If you see large orders appear at 'x' level is that just the actions of one player of the few hundred trading that instrument or various orders from multiple players. Are all of those large players uniformly initiating long positions, closing short positions, initiating short positions or closing long positions or more than likely, some combination thereof. Are they solely trading that instrument or are they using it to hedge a basket of the most influential stocks of the underlying index they actually expect to go the other way. There is no way to know this so other than the entertainment value, why spend any time trying to figure out how to use this uncertain information to your advantage. Pursuing the unknowable takes your focus off what is knowable and that is price action. I suggest you will be better served by trading what price does and not what you think it should do. Leaning on perfect world assumptions will only increase your exposure to risk.
On whether an order is filled at a certain price, and whether the market is moved by it, this has to do with the nature of the order.
If someone puts in a large market order, it will be filled, if necessary, piecemeal by being matched to offsetting orders until it has all been matched. It doesn't have to be filled all at once or at one price or against one equal-sized order.
@Mozart2112 mentioned "aggressive" orders -- orders to be immediately filled at the best bid or ask price -- which are filled against market orders or against resting limit orders, with the fill price moving up/down if necessary until all the size has been matched. (His explanation is very correct, by the way.)
So a market order to buy 10,000 may be filled in pieces, either against other market orders to sell or resting limit sell orders specifying a price, until it has all been matched. If all the existing sell orders at one price have been cleared off but there is more to be matched, price will then move up to find more matches until it is all done.
If the order is a limit order, it will sit on the order book as offsetting orders are matched against it, either the whole order at once, or in chunks. It isn't going to move price.
------------------
On the question of whether it's the derivative or the underlying stock index that moves price, the answer is, both.
The reason there is a futures market is not to give traders something to trade with ( ), it's to allow holders of an asset (in the case of the ES, holders of large baskets of stock that are close to the index in composition) to hedge their asset positions against the corresponding futures contract, allowing them to control their risk. So an asset position in stocks, for example, can be offset by a short in ES, insulating against moves in the stock market, since losses in one side are matched by gains in the other. (There are other strategies as well, but this gives you an idea.)
The two markets are kept in step by arbitrage, buying in one market and selling an equivalent position in the other. The arbitrageurs see an opportunity if the two get out of synch, and will buy or sell a basket of stocks and sell or buy futures contracts, whichever is the opposite action, cashing in on the difference. This will also squeeze the two back together, because of the buying/selling pressure on each side. This way they are never far apart, and it is also true that the balance of trading in either one will move both.
So sure, buying or selling in ES can and does move ES. And that movement moves the S&P. But also, buying and selling in the individual stocks in the S&P can and does move ES.
If you look at ES vs. the S&P, you will see that they are always moving very closely together, and not by accident.
There is more in the thread @Mozart2112 linked to above, or if you want a deeper dive, you can go straight to a detailed post on the question, here:
You mention a number of questions about price action trading, most of which I will pass on, because I don't want to comment on a particular trading method.
But I will touch on one of the points you raised, namely, does buying and selling in the …
---------------------
On the question touched on by several members, whether you can use the information about the buy and sell orders as a way to trade (called, generally, order flow trading), that is a question that traders will not necessarily agree on, pro or con. But there are traders who use it, some with success. As there are traders who use other methods, also some with success.
Trading is not necessarily a simple thing.
I hope you got your questions answered.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
If you look at 1 minute bars, you'll see volumes of 5k-10k contracts/minute at various times in an average 1+ MM day - often much higher volumes when cash equities open and close.
As someone wrote, the orders will get filled. How much they move the market is dependent on a vast array of variables. Liquidity in ES itself is part of the puzzle but other markets matter too. E.g., can the ES be laid off in cash equities or hedged with other instruments? How much inventory are MMs and large participants holding? How many hidden buyers/sellers will jump in as the price moves and volumes become visible?
Off hours, ES is the main game since it can be used by equity market participants to position based on news, margin calls, portfolio rebalancing etc. International markets also play a part. During cash equities, ES is moving in concert so a big day for Apple will show up in ES.
), it's to allow holders of an asset (in the case of the ES, holders of large baskets of stock that are close to the index in composition) to hedge their asset positions against the corresponding