If a position could move the market?

How do you manage a position that is too big to effectively use a stoploss?

Now, I'm not saying I am trading this way, but it is for me a mental exercise to consider how the MM(Market Maker) might employ a strategy that is fundamentally different than my own Retail perspective allows.

In this situation what are you looking for to mitigate loss? Or, how can you book profit?
The underlying problem in this situation(very large position sizes) is an inability to quickly close positions without negatively affecting prices.

Some may argue that this is an impossible situation, but there is a limit to available liquidity. The evidence for a liquidity cap is seen in the Dollar run-up of 2008, where in only four months the EURO lost 22% of its value versus the Dollar. Liquidity was low as Volatility was up. Like this (Volatility=1/Liquidity) where 1=Highly volatile and 0=No volatility. The reasons for this loss of liquidity are arguable. But, I am convinced it was because Large Banks, insert Lehman Bros here, were in trouble and going bankrupt(lol). The very "liquidity providers" couldn't PROVIDE anymore liquidity.

I am very interested to see some intelligent solutions to this problem. I think it will improve the trading of anyone willing to honestly consider the market from the other side.

Lets use an hypothetical situation.

EUR/USD 9:00am today 1/4/2018

You have an average Long position of 1.2020.
Current Price is 1.2066.
You need to offload your position with the maximum profit.
You also need to exit by the end of the trading day. You work in New York, but you want to be out before the London Fix at 11:00est.

How?

I'd look into my order book, see where liquidity is above the market, give a little push to the price right into that cluster of orders above, a wide spread up candle on high volume (even after an advance) makes the average trader super bullish anyway, so as their buying comes in, I'd take the other side of their long trades and unload them the position into the liquidity.

Easy right!

An alternative explanation for that trade situation.

You work at a large international bank. A large corporation wants to exchange an amount of EUROs for DOLLARs.
You have until the end of the day to make the exchange.
Your commission, as a bank, for this transaction is fixed. If you allow the price to move too far toward Dollar strength you lose out on some of your commission.
Ergo, the better deal you make while moving one currency into another the more you get paid.

Same prices and time of day apply.

It ends up being identical to the first problem, but a different reasoning for the same price action.

I don't know about that situation you said last time, because trading the institutions own money and market making is different. What you said would be market making, taking the spread + commission and processing the large corporations order. But if there are favorable market conditions, and the market maker takes up an own position, that is unloaded the way I explained. Here is an example happened today (this is CAD futures, inverted version of UCAD):



First they accumulated a position, that is the sideways churning (blue box). First arrow is where they started pushing the market, letting it rallying, second arrow is balancing their books, because when market makers push through a resistance, they have some shorts getting stuck, and they don't want to hold it while the market rallies (this is why you get retests of a breakout a lot of times), the market rallies to the target, and 3rd arrow is where they play the trick I wrote. It is not on this picture, but if you look further back on UCAD, you see there were a lot of trading in that area previously (liqiudity to unload the position)

And one more thing, this also shows how professionals anticipate the news. They knew the NFP will be weak and it will bring in USD selling, so they built a dollar short position, marked the USD price down, and when the news came out and public selling came in because of that, they covered into public selling (which is essentially buying, how you close a short position.)

Lesson: don't trade fundamentals and news, trade the charts

(This process happens on smaller timeframes also, on a day by day basis. But obviously an NFP is a bigger event, bigger campaign for the market maker.)

just curious when you are talking about looking in your order book to see where the liquidity is above the market. Are You Talking about seeing if you had any s/l orders in there? bc if you are talking about t/p all you would accomplish by pushing the market above were your orders are is getting yourself longer than you already are

Sorry I don't understand your question. But liquidity is just a cluster of orders from other participants. Above the market there could be buy stops, sell limits, the TPs/stops of these orders and also the TPs/stops of those who are already long/short. There are a couple of places where these tend to congregate, like below/above previous lows/highs, or where was a lot of sideways action.

In other words there are a lot of orders for buying/selling where liqudity is high. If you want to unload let's say 50000 lots and you just start to sell it randomly, the market will start going lower, you would push the price against you, get terrible execution and struggle to make money. If you unload it to liquidity, the market will take up the order more easily.

Hi Skracor247,
For what it's worth, in a previous life I used to manage very large equity portfolios (c.£4bn) where many of the large positions were very many times above the normal market dealing size of the security. What does this mean in practice?
It means you simply can't liquidate a position without crashing the price so you have to take a different approach.

First and foremost, don't take a position you can't liquidate at least in a sensible fashion. Remember always, something is only ever worth what you can sell it for. That is the harsh reality. If you have to own effectively illiquid positions (as I did) then you simply have to accept this at the outset: you can't get out. You have to accept that if things turn sour, you are going to take a very bad bath in getting out of that position. If nothing else, it makes you think very carefully about getting into it in the first place.

When you want to sell a large position, you have to consider liquidity first and foremost. You have to sell into strength, where there are willing buyers. If the market is weak you effectively have no exit. So you time your trading carefully, always sell into rallies, always buy into dips, do the deal in small pieces until it is done and accept the average price overall. There is no other way, unless you are lucky enough to do a block deal with a big counterparty wanting to trade the other way. But that is pretty rare.

In this respect at least, small retail traders have a big advantage over the monster institutional players: we can be nimble, they can't. They have a whole extra layer of liquidity considerations that we don't even have to think about. It is one of the reasons trends (and ranges for that matter) persist, because a large player is continually selling/buying a huge net position.

Yeah but in the example he gave the liquidity in your order book won't help you much to accomplish what you want to do. Let's say we are long 1 yard & have 500 mio t/p between 1.2070 & 1.2080 as well as 1 yard s/l above those levels. You would need to buy a ton ignoriert euros to push the market up those levels. Then you would be long the initial 1 yard + whatever you bought to push up prices + the 500 Mio you had in t/p and would still only manage to sell the 1 yard you had in stops. I think it you were to use then resources as a market maker to unwind that position you would just start skewing the prices you stream a little to the left so you would get paid more often & take and buy orders you had in your book into your position if prices move against you a bit.