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PTMC team 20.11 2014

Trading with Market Depth in Protrader

Hey there, Protraders!

Today we’ll speak about “Market depth” module, its possibilities and peculiarities. In order to assess in full measure the possibilities of this module, let’s remember the mechanism of the exchange price formation. Thus, trading on the exchange represents double auction between market participants who want to buy or sell an asset they are interested in. In this case the asset price is determined by the law of supply/demand. At any time, the trades are made by the equilibrium price, or by the price that suits for both the buyer and seller. The trade can take place only in the presence of the counterparty. Why the equilibrium or the best asset price is constantly changing? Buyers and sellers can exercise their desire to buy or sell the asset either "by market" or by limit order. Market orders are the driving force or the liquidity consumers. In turn, limit orders are the liquidity providers. To illustrate this thesis, let’s consider the case of purchase “by market”. Suppose, a trader sends a market order to buy 100 contracts of the asset he interested in. This market order needs the counterparty, in this case – the seller. Assume that only 10 contracts stand on the sale at the current price. In this case, the market order will be partially executed on these 10 contracts, but 90 remains still. Further, another limit sell order with value of 10 contracts stands at a higher price. Market order “will move” the equilibrium asset price to the side of this limit order and purchase of another 10 contracts will occur. And it will last as long as the purchase "by market" will not be executed in full measure. The “slippage” took place for the market order, which changed the price of the underlier. We can say that the asset price changes due to the action of market orders. When the market is liquid, and there is a large number of limit orders, it is more difficult to move the price. In illiquid time by virtue of the weakness of the limit side, it is easier to change the price and it requires a fewer amount of the market orders. This state is called “thin” market. Knowing the written above mechanism of the price formation, we can say that when assessing the relative strength/weakness of the buyers/sellers, as well as the ratio of limit and market orders, we can predict the dynamics of the asset price with some part of probability. For example, seeing the relatively small amount of limit orders at the approach to an important technical level at high activity of traders “by market”, we can predict the level breakthrough. And vice versa, the level with huge amount of limit orders with high part of the probability will not be broken through by weak flow of the market orders.To track this information we need to have a convenient tool. Market depth is such a tool.

To get an access to the Market depth module, choose the corresponding item in the Terminal menu.

Market depth module in Protrader

To get an access to the Market depth module, choose the corresponding item in the Terminal menu.

In the opened window we see the table with price data. In general case, these are the underlier price and the amount of limit orders by these prices arranged in the queue order. Limit Buy orders or Bid prices are presented from the left side. Limit Sell orders or Ask prices are located from the right side. The table view can be customized according to your preferences. So, the following parameters can be included to the table of price data:

  • MPID – the exchange, by means of which the trading is performed;
  • Price – Bid price or Ask price;
  • Size – the amount of limit orders by selected price;
  • Time – the time of the offer;
  • Avg. price – the average price which considers the possible slippages at execution;
  • Total size – the total volume of trading;
  • Volume – the volume of contracts traded during the day;
  • CCY value – Bid/Ask size in quoting currency.

All components of the module are flexibly customized to suit individual requirements of the trader. Option of quick trading using mouse is available here. To activate it, click on the button (1). Using table of quick trading (1), the orders on the set distance from the current price can be promptly placed. In order to estimate the market information more precisely, Time & Sales is output in the window (2). Thus, the trader has an opportunity to analyze not only data of limit orders, but also the dynamics of trades made by selected instrument. The order parameters are located in the menu (3): their type, TIF, execution prices and volume. From a technical point of view, this tool set provides the comprehensive information about the order flow on the selected instrument; the only thing that remains is to interpret correctly the obtained data. Let’s consider the main analysis methods of the Market depth and Time & Sales.

  • Trading when determining the imbalance of buyers and sellers. The dominance signs of buyers or sellers are defined by the indicators of Market depth and Time & Sales. When these signs appear, we trade in the direction of the prevailing side.
  • Trading at breakthroughs of the important technical levels. When approaching to the important technical levels, the relative strength/weakness of the buyers/sellers is assessed as well as the current liquidity. Based on this data, the breakthrough or bounce from the level is predicted.
  • Front running. The method of trading which represents tracking of the major orders in the depth and placing the own order before them. It is assumed that a major limit order will absorb all orders "by market" and the price will rebound from this level.
  • Trading with overlay indicators. If the traded asset has a strong connection with other assets, and certain time lag is traced in their interconnection, then the so-called trading in the direction of overlay indicator’s movement is used. Herewith, the dynamics of limit orders is tracked, and in the case, if the strong resistance is absent, the trading is performed in the direction of overlay indicator.

When implementing these strategies preferably to use in parallel the reading of the Time & Sales, since we can see the information about the made trades there. Tracking the dynamics, volume, side of the trades, we can significantly improve the performance of the trading system.

In general case, all these trading methods are reduced to the definition of the dominant market sentiment, and receiving of a brief advantage over other market participants. But it is necessary to be careful when using such methods, since we can observe quite often the market manipulation with the help of placing and timely cancellation of major limit orders. So, the trader who accumulates the long position can place a major limit sell order far enough from the price, thus showing to other market participants that the price with high part of probability will not grow. Some market participants start to sell actively, thus helping the manipulator to accumulate the long position. As soon as the long position will be accumulated, the large order to sell will be cancelled.

Also the information from the Market depth can be deceptive, considering the frequent use of the various execution algorithms of major orders. The simplest example is the Iceberg algorithm which consists in placing the large order in small parts at a specific price until the full execution. Thus, market participants don’t see the large limit order in Market depth. For them it is just a sequence of average volumes for this instrument at a specified price that does not cause the known interest to this level. Herewith, the “visible” volume of the Iceberg is flexibly customized to suit the average liquidity of the selected instrument in a certain time of trading.

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