How do market makers and institutional traders trade?

This thread is dedicated to the question: How do market makers and institutional traders trade?

Points to consider:

1. What trading strategies do they use: including - Price action, indicators and in general, their trading methods.
2. How do they manipulate the price and retail traders.
3. What types of analysis do they use?

Question: Do institutional traders use Gann analysis?

Market Maker Tactics

The Smart Profits Report: Issue #205
Monday, May 2, 2005
Market Maker Tactics: What Market Makers Really Do
By Lee Lowell
Advisory Panelist, Mt. Vernon Research
Got a bad fill on a trade? Must’ve been the market maker tactics, ie. playing their games. Got filled on a stop loss right at the bottom, only to see the market turn around and go in your favor… without you?
Must’ve been the market makers playing their games again, right?
Well, I’m here to tell you that it’s not always the market makers who are playing the games. I should know: I was one of them.
For six years I slugged it out in the pits of the New York Mercantile Exchange (NYMEX). Being a market maker (or local, as we sometimes called each other) doesn’t always get you a good rap.
Let me give you the skinny on the life of one of these guys.
The Ultimate NYMEX Insider Speaks
The experiences that I recount here pertain to the pits of one of the largest commodities exchanges in the world, the NYMEX. While I’m convinced that most market makers play similar roles, I can’t speak for the guys who trade on the floors of the stock exchanges around the world.

1. The NYMEX is a global center for the trading of energy futures and options. These energy contracts consist of such products as crude oil, heating oil, unleaded gasoline and natural gas.

1. The NYMEX also houses the COMEX, which trades in metal futures and options consisting of gold, silver, platinum and palladium.

What Does A Market Maker Actually Do?
In the simplest terms, a market maker helps facilitate the execution of a trade by providing a continuous bid-and-ask market for a futures or options contract to any interested party.
You want to buy a futures contract for July Natural Gas? Who do you think gives your broker a quote for the most current price of that contract? Looking to get a market on the April Crude Oil $48/$49 call spread? It’s the market makers who provide you with a bid/ask quote on that call spread.
In stark contrast to how most off-floor retail players trade, the market makers usually don’t trade with a prediction about the direction of a particular market.
The market makers are purely there to try and buy a contract on their bid price, and then either try to sell that same contract on their offer price, or hedge their delta risk immediately if they can’t offset the original trade.
Relax… Most Market Maker Tactics Aren’t Out to “Get You”
When you ask your broker for a quote from the floor (which you should always do before placing ANY futures option trade), the market makers don’t know whether you want to buy or sell, so their tactics aren’t “out to get you.”
They don’t have a hidden agenda in which they try to rob you of all your money. In fact, the market makers try really hard to give good, accurate and fair quotes because, quite frankly, the ones who give the best markets are the ones who get involved with the most trades.
If you’re the type who gives very wide bid/ask quotes, or someone who doesn’t honor his markets if a broker wants to buy or sell from you, then you won’t be around for very long.
It’s a market maker’s job to be tactically involved with as many trades as possible, while getting a small edge with each one of those trades.
The tighter and fairer you make a quote, the more the brokers will trade with you. This is how market makers earn a living - by providing continuous, tight and fair quotes.
This Tactical Seat Costs $1.8 Million - Why Waste It?
It is a privilege to trade on any exchange. And in exchange for that privilege, the market makers must outright buy their own seat on that exchange, or they must lease a seat.
The last time I checked, a seat lease on the NYMEX cost about $17,000 a month, and a seat to buy cost $1.8 million! If you’re a market maker who leases a seat, you’re already in the hole $17,500 come the first of the month.
That’s a tough nut to crack month after month. And that’s why it’s in the best interests of the market makers tactics to provide a continuous flow of good, fair and quality quotes.
So the next time you get a bad fill on a trade, the market maker might not be to blame.
Good luck,
Lee Lowell
http://www.smartprofitsreport.com/Ar...actics205.html

Statistical Arbitrage, Quantitative Analysis and Price Models are
the most used tools by institutiions I'd say.

Can you expand on these? Any examples?

Hard to give examples.
Has alot to do with applied mathematics and computer science.
Is impossible to use as a retail trader anyway.

Nice one Tjpld. Thanks for the input.

Really trading on a institutional level is so much different than what
retailers do. It's 110% pure math. They don't look for MA bounces
on M5 timeframes or such nonsense.
If you look for jobs at hedge fund they all want mathematicians.

http://www.hrg.net/index.php/job_post/listing/2

Find me a job that doesn't have "algorythmic" in its name.

Why would a retail trader be unable to trade the same methodoligies as an institutional trader; or jump on the back of their trading methodoligies?

If they are trading purely on a mathematical basis, then there will be certain criteria for buying and selling. Is there no way to know what they are doing, and thus follow in their slip stream?

Due to insanely high spreads on MT4. Yes they are high for any pair.
That way you pay for a free platform. Execution speed. Requotes. etc. etc.

Mostly retrail traders simply would not understand the mathematical part.

If one had a very good mathematical and quantitative understanding, then one could write their own succesful systematic trading system.

What's your definition of a high spread, and what do institutions get?

There are to many technical restrictions when trading with a bucketshop.
I don't even think that MT4 is capable of dealing with the computations since it's not designed for that job.

Spreads go anywhere from <0 to >0. Yes they can get negative or zero.
You will never get this.

I trade with MBTrading and I've actually executed trades where the Bid price was higher than the Ask price: but you're right; in general, the spread is higher.

I've been looking at the different trading methodoligies of big trading players.

One: ""Harry Boxer has more than 35 years of Wall Street investment and technical analysis experience, including eight years on Wall Street as chief technical analyst with three brokerage firms. Former chief technical analyst and columnist for AmericaInvest.com and winner of the 1995 & 1996 worldwide Internet stock-market trading contest, "The Technical Analysis Challenge," Harry is widely syndicated and a featured guest on many financial programs and sites.""

This is his charting method for stocks: http://www.thetechtrader.com/info/charts/

Is he only trading like this because he is providing a service to retail traders: or did he, along with other institutional traders, trade like this on Wall Street?

For trading a 0 spread, you will need a Prime Brokerage and direct access to the market, like the big banks have. In order to do that, you need the funds or have clients with the funds. Insitutional trading is NOTHING like retail. Not even close and its not funny. Its serious business! They don't trade using indicators ... at most, all you'll see is a bright lit room full of traders ... at best, MainFrame admins/operators, a few traders (here and there), mathematicians, and quantitative scientists.

The set up I can think of off hand is: The Man Group www.mangroupplc.com/, a pure quantitative trading fund that operates with less than 7 traders (from what I heard)

http://www.amazon.com/gp/product/019...lance&n=283155

It's a large floor full of traders on various desks (example, FX spot, fx forwards, Rates, Swaps, Equities, Prop trading ,arbitrage) and each desk has sales people for their desk. I do see indicators and charts being used on the floor mainly on proprietary trader desk, and I do know of at least one FX spot trader that uses indicators to speculate.

Most however just initiate orders , and if the order flow is good will jump on board with a speculative position. The finer details are unknown to me though.
Regarding algorythmic trading, one of our guys puts over 70K trades a month using algorythmic trading... I can't imagine what the cost in doing that with a spread even as low as 1.8 pip.

Would love to get a pic for those who have never seen a trade floor but not sure how compliance and security would like that. (big brother is always watching to say the least) and I would certainly love to sit with the spot traders and get a break down of their daily methods. Not in detail obviously, but just an idea of what they do and what they use to decide on when to get in. Maybe I need to get them on a Friday arvo after a few beers .

I have had a brief discussion in a social enviroment with a spot trader and he basically pointed to order flow, if the orders are large in a certain direction(since they are placing them for the clients) they might jump on board for a speculative position as well or if they see stops are close then they might wait until they are hit then jump on board the band wagon in the direction of the order flow, again I would like more details on this if anybody in here knows. I would also like to get more on how they trade in terms of hedging and risk management. It just facinates me this whole trading business.

But we do have a LOT of real traders here across all markets, not just computers. In fact our highest profitble desk is all human , yes FX Spot.

I got to see them cost a cross(GBPAUD) and enter it into Reuters Dealing. Man, why did I go into IT, trading is far more interesting.

Galation we have talked before. My system is based on these vary things. Trading alongside the market makers.

Look for areas where they are most likely to get active and trade with them.


thats what i do

good to see some people still have success doing human trading...

hmmm might be a good idea to learn programming me thinks...

Do we really care, this sounds like a rookie question? Unless your going to have your funds managed by an institution why does that matter?

lol it is the rookie discussion section......i dont believe all prop trader strategies are highly complex e.g. Takisd and Fti. They both have institutional experience yet we can understand their styles.