Formalising common approaches to trading - page 28
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
"Who can you trust?"
It is already 27 pages long and the general approaches to trading are not formalised. Instead it discusses the behaviour of the crowd and the market makers and the reasons that have influenced them. The topic does not correspond to the content.
One should not look for causes but analyse the effect, I think.
Again, that's what everyone knew before, and it's kind of messy and incomprehensible.
I am interested in the specific rules of their game, it is not clear how they earn by providing liquidity and narrowing the spread, it is mathematically no longer profitable, I am interested in what volumes as a percentage were given mm from the total turnover, etc.
I've tried to find the answers from time to time before, but I haven't found any, all general phrases.
They do not have a guaranteed risk-free income, although in the stock markets they are often remunerated by the issuer. There is also earnings from the spread, provided that MM's commission and other costs are lower than others. They are provided with such benefits.
I've tried to find the answers from time to time before, but I haven't found any general phrases. Ideally it's a flat and then their earnings are almost risk-free due to spread. Let's consider a simplified example - spread is always constant=s, point=p, price moves without gaps (always by 1 point), on every tick the volume of transactions is the same and equals 1 lot. Let's label a tick upwards as "+", a tick downwards as "-".
With a sequence of +- and -+ ticks MM earns the value of spread=s, MM has no aggregate position
at sequences ++- and --+ MM earns s-p by closing the first trade and keeping 1 lot in position
at sequences +++- and ---+ MM earns s-2p and stay in position with 2 lots
etc.
The scheme is very simplified and does not take much into account, but still :) In general, MM in its most primitive form does not benefit from nonreciprocal moves exceeding spread in pips. The rebound at tick level is profitable. Therefore, decreasing of a pip price is profitable for brokerage companies and allows them to decrease spreads. But this is on the condition that there are enough clients for their deals to be executed actually on every tick that becomes much more than before the transition to the additional symbol.
In exchange markets specialists provide liquidity, in futures markets they are market makers. For them there are strict requirements and even formulas for spread that they should provide. But there is a reservation that not all the time but about 2/3 (more precisely you can look for example at the MICEX site - requirements for market makers). Exactly in these 1/3rds, strong rebound movements occur :). In the exchange rules it is called a quote break time.
http://www.micex.ru/markets/futures/organization/marketmakers/1129
http://www.micex.ru/articles/file/3877/rules-19-04-2006.pdf
In principle, it is a similar situation for DCs. Except that their main income comes from the unprofessionalism of their clients and giving them high leverage. Quoted break times are replaced by higher spreads, requotes and other chips
What about gaps? Only last night there was a significant gap in all the major markets. Where did the gaps come from and why?
Gaps in stock markets are formed as follows: there is a so-called pre-trading period when only limit orders are sent to the system and no trades occur. That is, there are a bunch of bids from bidders where purchases are mixed with sales in price. For example, buying bids are 100,101,102 and selling bids are 99,100,103,105. At the moment of the trades' beginning the price is automatically calculated with maximal volume of trades. This will be the opening price of the day. There is also a postmarket - on the contrary the limits are not exposed there. Learn more (MICEX)
In the OTC market, prices are indicative and there are many bids and asks at the same time. How they set them after the weekend is everyone's business, but they are probably also guided by each other's bids. Perhaps, they are guided by larger participants who are market makers for this instrument, or maybe they are looking for a weighted average of their clients' bids, or guided by the price of a similar asset on the exchange markets. As far as I know, there is no strictly regulated algorithm for the first price formation.
And brokerage companies may give quotes of one major MM or mix quotes of several ones. That's why their heps are copied from the quotes flow of larger liquidity providers.
But in fact their interest is similar to the stock markets - to find the price that will provide the maximal opening turnover. But the ways of finding it are different for different markets.
Slava, hello! It seems that the quotation process and price formation principles have been more or less discussed. Will there be a continuation of the (in my opinion interesting) thread? :)
By the way, how was your rest?
Slava, hello! It seems that the quotation process and price formation principles have been more or less discussed. Will there be a continuation of the (in my opinion interesting) thread? :)
By the way, how was your rest?
Hi Anatoly, had a great holiday :)
I hope the continuation will be. Just no discussion so far. Apparently we need to move on to more popular issues within this thread.
The scheme is very simplistic and does not take much into account, but still :) Generally speaking, MM in its most primitive form does not benefit from a rebound of more than the spread in pips. The rebound at tick level is profitable. Therefore, decreasing of a pip price is profitable for brokerage companies and allows them to decrease spreads. But this is supposed on the condition that brokerage companies have a big enough amount of clients so that they execute deals actually at every tick, and the amount of deals becomes much larger than before the additional mark.
On the movements MM can also stay with a small position. There are methods of "encouraging" by price and/or volume. But in general yes, MM's price movements are disadvantageous.
Reducing the spread is not because of MM's desire and small price step, but because of competition. If you have a larger spread than your competitor - you lose, because the competitor has executed his bids, and you haven't. It is more profitable for the MM to keep a large spread, because if the price moves, he risks less, and if the price doesn't move, he earns more.