Market Maker tricks & how to beat 'em!!

[RichKid]

First of all what do they do and how do they do it (ie take advantage of us)? And secondly how can we minimise the impact of it? I'm basically looking at warrants and optons here.

Warrant issuers often have pricing matrices but they don't always stick to it. And the 'market' disappears when it is really volatile eg recent correction.

With options, from what little I know, sometimes there is a market at other times you wont see a bit or offer for a while, do they take breaks during the day?? Very quiet in the morning and at the end of day. They seem to be a fair bit away from the fair value price too in terms of offers, bids seem to be closer to fair value, all from my very limited experience so correct me if I'm wrong. I've also heard Wayne and others mention IV and its effect on prices, not sure if MM's take advantage of that in any way but they probably do.

Money Tree suggest elsewhere that if you are having trouble being filled to halve the spread and you'll be filled quick. Eg 12c bid, 18c offer then you bid/offer 15c. Hope that's what he meant. I went for an ASX warrants beginners seminar and the person boasted that it has to be a 'win-win' situation or it wouldn't be in the mm's interests- I think that's not entirely true from what I've seen, us little people just get used a lot of the time.

 

[wayneL]

Aussie MM's use to drive me to drink. So many trading opportunities went astray because of these little nuances.

All I can say is, unless they want to be magnanamous and play fair, don't give them your business, they don't deserve it.

In the US the liquidity, plus the presense of several MM's in most markets, keeps it all "relatively" honest. Cottle explains MM activities a bit in "Coulda Woulda Shoulda" but it's real savant sort of stuff.

I once took a preliminary mathematical test that they use to screen out dumbs**ts (like me). Of course I failed miserably ROTFL.

They are one mob of smart enchiladas.

 

[RichKid]

Aussie MM's use to drive me to drink. So many trading opportunities went astray because of these little nuances.

All I can say is, unless they want to be magnanamous and play fair, don't give them your business, they don't deserve it.

In the US the liquidity, plus the presense of several MM's in most markets, keeps it all "relatively" honest. Cottle explains MM activities a bit in "Coulda Woulda Shoulda" but it's real savant sort of stuff.

I once took a preliminary mathematical test that they use to screen out dumbs**ts (like me). Of course I failed miserably ROTFL.

They are one mob of smart enchiladas.

Well, I'm definitely way below everyone's league as far as maths is concerned but will learn it bit by bit eventually. As for MM's- maybe the increase in the number of CFD providers will create more competition (I assume at least some will need synthetics to keep going). If you really want to get scared witless about how clever these guys must be pop down to your local (big) computer bookstore and you will see four inch thick textbooks on just the maths behind the programming languages- scary stuff- and here's wee little me trying to work out how to beat them! BUT!! Where there's a will there's a way so I'll keep at it, if they rep people off too badly know one will trade so there is some margin of safety (I think??), will take years in my case though to get good at it. Thanks again Wayne for giving us your insights, 'be prepared' will be my motto!

 

[mr. jeff]

There are some interesting comments here on MM's but might not be entirely relevant in some parts now. Still an interesting post if you haven't read it.

 

[mr. jeff]

from elite trader .com
"1. To move big size a player can use hidden orders to avoid disclosing his real intention by displaying real order.

2. To stimulate other participants to fill his order a player can display fake orders of significant size on the opposite side.

3. To attract big interest looking for liquidity a player can display real size demonstrating that liquidity is there.
4. To move big size on active stock within certain price interval a player can use fake order of significant size trying to cup the movement until he is done accumulating or dumping his position.

5. A player can use his real identity or hide behind ECN depending on his intention. He can make an inside market being on both sides and under different identities."

may be of interest to some.

 

[wintech]

Observations of MM's habits

One MM that has aggressively sought business in the warrants sector has the habit of removing all bids an offers when the market becomes choppy or too volatile for them. Regularly I have witnessed them removing B&O's for up to 10 minutes and their excuse has always been 'server down'.ASIC was interested to learn of that (oh yes! very proactive) and sent me a complaints form!

Now I quote the ASIC form code when I ring the trading desk, and mention to the operative that the call is being monitored.... B&O's back up in less than a minute (total coincidence of course)

Another curiosity that I have noticed daily on the Fx markets is the dramatic spiking that takes place just at open or soon after of the UK, USA market, not so much the Tokyo. This takes place also on relatively flat days where no news releases are pending etc. They move from the lower Bolli to the upper in the space of 1-2 hrs where a 10 pip average move /hr was normal. The Bolli has expanded dramatically leading up to the occurence, giving the parameters for the move to 'fit' within.The spike is equivalent to 4-5 times the average movement...30-50 pips in an hr.

Has anyone experienced the same and can shed light on the bona-fide reason why this happens.

cheers