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Orders consuming and providing Liquidity

  • #1
  • First Post: Jun 1, 2011 1:48pm Jun 1, 2011 1:48pm
Hello,

Would anyone care to comment if I have the following correct:

Market orders(stops) consume liquidity - an example when they are commonly above a S or R level, they offer liquidity to the big guys?

Therefore would limit orders provide liquidity?

Thanks in advance
  • #2
  • Jun 1, 2011 3:41pm Jun 1, 2011 3:41pm
Quoting mitel
Hello,

Would anyone care to comment if I have the following correct:

Market orders(stops) consume liquidity - an example when they are commonly above a S or R level, they offer liquidity to the big guys?

Therefore would limit orders provide liquidity?

Thanks in advance
are you asking if a limit order that exists, but has not executed yet, will cause the market to move, even before it has been touched?

if that is what you are asking, what would be the difference in that and so-called stop hunting?
  • #3
  • Jun 1, 2011 4:03pm Jun 1, 2011 4:03pm
Liquidity is the depth/size of the limit order book.

Limit orders -> provide liquidity.
Market orders -> consume liquidity.
The breaking of a wave cannot explain the whole sea.
  • #4
  • Jun 1, 2011 5:23pm Jun 1, 2011 5:23pm
Quoting mitel
Hello,

Would anyone care to comment if I have the following correct:

Market orders(stops) consume liquidity - an example when they are commonly above a S or R level, they offer liquidity to the big guys?

Therefore would limit orders provide liquidity?

Thanks in advance

Correct - limit orders provide liquidity while market orders consume liquidity.

A limit order cannot cause the price to move since it must be executed at a fixed price. A market order can since it is allowed to chase liquidity up/down the price ladder to ensure a fill.

A limit order can stop a move in its tracks though.
  • #5
  • Jun 1, 2011 5:58pm Jun 1, 2011 5:58pm
Thanks for the replies

I had been thinking about this and can see that liquidity in the form of limits provides a kind of framework to the market.

But how about when you have a lot of buying pressure to the upside...wouldn't sell limit orders be getting consumed?

Sorry starting to confuse myself i think.
  • #6
  • Jun 1, 2011 7:09pm Jun 1, 2011 7:09pm
For you - yes. For dealers it's sometimes the opposite.
  • #7
  • Edited 7:35pm Jun 1, 2011 7:11pm | Edited 7:35pm
Quoting mitel
Thanks for the replies

I had been thinking about this and can see that liquidity in the form of limits provides a kind of framework to the market.

But how about when you have a lot of buying pressure to the upside...wouldn't sell limit orders be getting consumed?

Sorry starting to confuse myself i think.
Buying pressure is consuming limit sell orders, correct.

If you're really interested in the subject then Trading and Exchanges by L. Harris is a great book for you. Also you could try marketdelta.com (or watch their videos)(or watch DOM on an ECN) and see market mechanics in realtime. Futures market is a little different though - there's no interdealer trading.
  • #8
  • Last Post: Jun 1, 2011 7:20pm Jun 1, 2011 7:20pm
Quoting mitel
.

But how about when you have a lot of buying pressure to the upside...wouldn't sell limit orders be getting consumed?

Sorry starting to confuse myself i think.
Depends on what market sentiment & sensitivity, if in one case market engulfed on bearish euforia, most of people will forget about bull. When that time hapens, a little shake when good news comes out will give easy bullish move & caught most people offguard. This, mostly will causing panic, the seller will going edgy, a little more push to the north will give them a great fear to loss, so they will cover they position by exiting & even change direction by follow the buying. The panic effect like that usually consume liquidity to the upside because most will use market order that time.
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