Identifying Short Covering: Day Traders Perspective

[GCB]

I'm curious about something keymoo said, that the tape only shows market orders. Is this true? If so, why? (Or is the other side of the market order which is shown on tape a limit order?)

Do market orders always have to be matched with limit orders? Or can two market orders or two limit orders be matched? If so, do these appear on the tape and how? It would seem from what's been said and how the tape appears that market orders are always matched with limit orders. Otherwise at what price would they be matched and how would they be presented on the tape, as buys or sells? But then, this begs the question, if there is only one buyer and one seller in the market, and they both place market orders, are we saying their orders cannot be matched until somebody comes along with a limit order? Or suppose they both place limit orders for the same amount of shares at the same price, on to buy and one to sell. How would these be presented on the tape? And what does it mean when an order executes "between the bid and the ask?" Is that two market orders being put together?

[keymoo]

It's easier to get this straight in your head if you look at the pit. At any time in the pit there will always be a bid and an offer. The bid is a buy-limit order and the offer is a sell-limit. These prices will be the best bid price and the best offer price and the difference between them is called the spread.

So, let's take the SP as an example. If the best bid in the pit (the highest someone is willing to pay) is 1410.00, the best offer price would likely be 1410.50. Because there is a difference in the prices, people on the bid and on the offer never trade with each other. So, limit orders never get matched because an agreement on price has not been reached - there's 0.50 difference in price.

OK. Now a trade is executed only when someone who needs to buy or sell NOW comes to the market and wants to place his order. So let's say we have a keen buyer who needs to buy urgently. He won't place a bid (limit-order) to buy because he may not get filled - it's just a bid. He was to wait for someone to sell to him to get filled. Instead, as a keen buyer he will buy at the best offer price in the market at the time which is 1410.50. The 1410.50 appears on the DOM as an ask. When the transaction takes place and our buyer hits the offer and agrees to buy at the price the other guy is offering, the transaction shows up on the tape as a BUY, because he bought it at the market.

The tape can show bids and offers if you switch that option on in tradestation, however these are not trades, they are just bids and offers. Trades that take place are market orders - people hitting the bid, or hitting the ask - because they are a keener buyer or seller. This, I feel is important to understand when you hit levels of resistance.

For instance yesterday on YM we had a lot of resistance at VAH and the pivot. There simply were a lot of people on the offer (people with sell-limit orders) around VAH and the pivot - people that either want to take profit there from their longs, and people wanting to fade the pivot/VAH. To get through this thick layer of offers, buyers have to come in strong and persistent to exhaust all the offers which may take some time as we saw yesterday with price hugging the pivot. There were lots of people buying at the market, and there were lots of offers to absorb all the buying - hence price didn't move up. However, once all the offers have been filled and buyers still come in, price then starts to move up to the next best offer price.

I hope that clears things up.

I'm not clear on prices that take place between the bid and the ask - if someone knows this I'd love to understand it. In the pit this usually only happens between locals where they trade with themselves, but I'm not sure how this would happen on YM.

[ItalianSharp]

Excellent posts guys.

As far as I understand about prints on the tape coming out WHITE - execution occurred between the bid and the ask - it's gotta be something to do with the pit and market makers. Since the market maker's job is to make the market, when the bid and the ask are off by more than one tick - as in the ES example mentioned in this thread - he steps in and satisfies both demand and supply.

I personally ignore those prints.

[dalby]

this is spot on. every trade that occurs on the bid or the ask (which is 95%+ of YM trades) is a market order for one person and a limit order for the other.

so, which side is making the market orders tells you a lot. that's the whole concept behind market delta, tick delta, etc.

and a big part of tape reading.