How do MM's work?

jezza888

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Retail traders are offered, through numerous bulletin boards, website, TV and newspaper adverts, online searches and various other means, a million and one different ways to trade the markets.

The variety of systems, methods, physchological views are amazing. Everything from 'the markets are a mirror of yourself' to buy and sell in overbought/oversold indicator A, B or C.... You can use trendlines and support and resistance. You can just look for breakouts and patterns, or put your money in the hands of a mathematical indicator.

Now, I may well be far off the mark here but, as far as I'm aware, the markets are moved by market makers and large corporations.

What I'd like to know, if possible, are there any books, or threads, or any ex MM's here that can shed light on how and why the BIG money makes their decisions. They aren't the ones who follow the market and try to pick tops and bottoms are they? They make the market and the tops and bottoms!?

how does the big money make the market. To keep it simple, we'll use the FTSE 100 as an example. Do they sit in front of pretty charts and decide where the market is going or do they move it? Do they go to physchologists to discover and change themselves? Are there so many diferent inputters that even they are trying to take probability trades and using GANN, Elliot wave, Oscillators and moon cycles or, are they just moving the market through very simple methods with normal reasoning and if any logged it T2W would they laugh at people using these over the top methods and talking about markets being mirrors!?

Surely, they make the market, decide on its direction and we just all follow, no?

Any directional advice for my quest of the basics of the markets appreciated...

Jez
 
read reminiscences of a stock operator. that will give you the basics. it may be old, but somethings never change - especially human nature.
 
charliechan said:
read reminiscences of a stock operator. that will give you the basics. it may be old, but somethings never change - especially human nature.

Not all the market makers are human any more.
 
So how do the non human MM's anticipate decisions? Is it any different to Joe Bloggs in his spare room/office?
 
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jezza888 said:
So how do the non human MM's anticipate decisions? Is it any different to Joe Bloggs in his spare room/office?

I am not quite sure what you mean by anticipating decisions.
I don't think they anticipate anything, they just run a book.
 
Yeah, probably not best description ever...

Just trying to understand how the MM's base their decsions on trades.... Are they the ones moving the market, and by what criteria do they decide? ie, are even the biggest players using half the systems/methods/theories used on these boards or do things like GANN, Elliot wave, Indicators or do theynot even come into the equation? And if not, why would anyone bother looking at them? Surely they are then pointless?
 
Market makers don't make decisions on trades they just provide two way quotes.
They are generally obligated to provide a bid and offer at all times and the
only freedom they have is to adjust the quote price and quote size.

They also do not generally move markets it is the other market participants that do that.
 
These other market participants...

Are they big corporations and/or wealthy individuals? As they are the ones moving the markets, are they, like the retail trader, trying to decipher market direction by many of the methods that exist as there isn't obviously just one person/company, or, are they digesting news and deciding from completely different points of view?

Are those who move markets just looking at the general worth of said market and trying to find a wiling opposing buyer/seller and couldn't really care less about which fib level we are at?

The more I type the clearer the basics become and how this is something I should have studied long ago! It seems the further you strip it down and move back to the source the clearer it becomes.

Also, the simpler you strip it down to, the more it shows how pointless and unnecessary all the indicators and theories become.
 
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It depends on the market but in almost all markets commercial and institutional money dominates
market behaviour. Retails traders have minimal impact.

As ever, a variety of techical and fundamental factors will determine investment and trading decisions.
However, there is probably more of a bias towards fundamental analysis and fair value pricing models.
 
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So there is a possibility that the large commercial and institutional money traded could have been based upon a ross hook set up or a bounce of a fib level, an elliot wave or an oversold indicator? Or are they just made up for the benefit of retail traders to try and achieve an edge in order to profit consistently?
 
jezza888 said:
Also, the simpler you strip it down to, the more it shows how pointless and unnecessary all the indicators and theories become.
Absolutely. Just Price, Volume and Time.

That's not to say the occasional judicious use of a trendline to confirm line-of-sight or LII for micro-management on entry & exit isn't a good thing - it can be.

But everything else on the 'poker-playing' side of market trading is pretty much extraneous.

Take HSBC this morning. Fantastic profits reported, but worst performing customer service bank. Is that good, or bad? What would you have thought before the UK market opened? Well, the market liked it short term. But what about long term? This is nothing to do with MMs. But everything to do with the real question you were asking.

You're on a hiding to nothing looking too deeply into 'market mechanics'. I even used to think that fundamentals led price. :LOL:

There are games played for sure by those with the clout to play them, but you can see what they're doing. Giants leave footprints. I just love that phrase. If you want to get in ahead of them, be my guest, but it's much safer to tag onto their coattails.
 
TheBramble said:
Absolutely. Just Price, Volume and Time.

That's not to say the occasional judicious use of a trendline to confirm line-of-sight or LII for micro-management on entry & exit isn't a good thing - it can be.

But everything else on the 'poker-playing' side of market trading is pretty much extraneous.

Take HSBC this morning. Fantastic profits reported, but worst performing customer service bank. Is that good, or bad? What would you have thought before the UK market opened? Well, the market liked it short term. But what about long term? This is nothing to do with MMs. But everything to do with the real question you were asking.

You're on a hiding to nothing looking too deeply into 'market mechanics'. I even used to think that fundamentals led price. :LOL:

There are games played for sure by those with the clout to play them, but you can see what they're doing. Giants leave footprints. I just love that phrase. If you want to get in ahead of them, be my guest, but it's much safer to tag onto their coattails.

I would have thought the use of LII is a very good thing where applicable as it actually shows what the large money is doing to an extent and that is the important factor surely?

My original question though, was not so much, how to get ahead of them, but to understand them. To understand why the large money went long or short? We, at the the most basic and simplist form, base decisions on breaks from key supprt and resistance lines and major trend lines.... Do they see these lines too and view them as we do or am I barking up the wrong tree.

(I should probably point out I trade FX mostly and have never read a single trading book which could explain my most basic market ignorance :cheesy: )
 
jezza888 said:
So there is a possibility that the large commercial and institutional money traded could have been based upon a ross hook set up or a bounce of a fib level, an elliot wave or an oversold indicator? Or are they just made up for the benefit of retail traders to try and achieve an edge in order to profit consistently?


some institutional trading floors may use charts, but not in the way most here use them. to be honest, if you were to bring up a chart on many (but not all) banking trading floors, you would be laughed out of your job.

strategies tend to based around fundamentals, known order flow (from customers - often other institutions, funds etc), information/news, and sometimes technical levels, but never something like macd, rsi.

some places organise their trading teams in different ways. some are asset focused, others are not. eg. i believe (but not 100%, just judging from their building/floor layout last time i was in there) that goldman sachs is asset focused, so a trader there may specialise in say equities, but all equity products - stock options, stocks, index futures etc - any thing equity related. others are not, and more product focused looking at either derivatives, cash, otc etc....

sometimes a bank trader could well split his roles between market making and running a prop postion. some brokers may also take on the role of market maker in some cases.

it really does depend on the internal structure of the bank and also the market.

although many market makers are now electronic, this is generally only true for electronic exchange traded products, and are really just another blend of strategy.

most banks get paid for assuming a risk than trading a position - eg they may be happy to lose $10m in the market under brief exposure if they are making $15m in commission.
 
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TheBramble said:
There are games played for sure by those with the clout to play them, but you can see what they're doing. Giants leave footprints. I just love that phrase. If you want to get in ahead of them, be my guest, but it's much safer to tag onto their coattails.
Tony,
I don't want to take the thread off topic, equally, your comment warrants further discussion. If you care to start a thread in which you outline your views as to how this objective may be achieved, it would, I'm sure, be of great interest to many members!
;)
Tim.
 
Although not necessarilly mm's, some of the medium/smaller sell side institutions also use information from the commodities side in helping to formulate strategies on the equities side. As Charlie says (resisting the temptation to say - don't play with matches), even at their level, order flow is key, i.e. recommendations are released to successive tiers of clients, with some clients "crossing" on the way into a stock with those on the way out who received "the nod" much earlier.

I've never seen a macd, rsi or even trend-lines used, even at that level, other than for consumption by retail clients. Mention something like mean reversion and half the guys wet themselves whilst the other half will just sneer.

Since you mentioned the FTSE and FX... One of the more interesting examples of strategies of recent times was the Royal Dutch / Shell unification. Apart from generating huge (and I mean huge) deals on the equities side, lots of them to do with A Share / B Share status and tax exemption, it also generated massive flows on the FX markets.

None of this had anything to do with trend lines, fib ratios, etc.

I remember at the time I was astounded that only one person on here (either Gamma or Arbitageur.. can't remember who exactly now) actually mentioned it, but maybe that's not so surprising.
 
timsk said:
Tony,
I don't want to take the thread off topic, equally, your comment warrants further discussion. If you care to start a thread in which you outline your views as to how this objective may be achieved, it would, I'm sure, be of great interest to many members!
;)
Tim.


I too would be interested to read more on that. Especially the giants footprints!
 
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sandpiper said:
Although not necessarilly mm's, some of the medium/smaller sell side institutions also use information from the commodities side in helping to formulate strategies on the equities side. As Charlie says (resisting the temptation to say - don't play with matches), even at their level, order flow is key, i.e. recommendations are released to successive tiers of clients, with some clients "crossing" on the way into a stock with those on the way out who received "the nod" much earlier.

I've never seen a macd, rsi or even trend-lines used, even at that level, other than for consumption by retail clients. Mention something like mean reversion and half the guys wet themselves whilst the other half will just sneer.

Since you mentioned the FTSE and FX... One of the more interesting examples of strategies of recent times was the Royal Dutch / Shell unification. Apart from generating huge (and I mean huge) deals on the equities side, lots of them to do with A Share / B Share status and tax exemption, it also generated massive flows on the FX markets.

None of this had anything to do with trend lines, fib ratios, etc.

I remember at the time I was astounded that only one person on here (either Gamma or Arbitageur.. can't remember who exactly now) actually mentioned it, but maybe that's not so surprising.


This is what I suspected.

Its amazing to read this site from all the way back to the start and from many a trusted and new source and its always 90% 'methods' and systems and the million and one indicators. Not that I'm saying profits can't be made by doing this but it does seem to make more sense to understand how the market really gets from A to B and why. I have been thinking recently about how many different ways everyone trades, then disputed every part of it. from trendlines and technical levels through to deep physcolgical importance.

It really does throw 95% of everything I've read and at the same time it has just made everything so much clearer, simpler and much easier to understand. I think understanding how the market moves and why, and by the people who actually move it, should be the most important factor.

Thanks guys, I think I have learnt more today than in the last two years studying!
 
jezza888 said:
I would have thought the use of LII is a very good thing where applicable as it actually shows what the large money is doing to an extent and that is the important factor surely?
I said LII can be a good thing. But the very last thing the 'big money' wants to do is to 'show' you what they're doing. Quite the opposite. And the subject of a number of other threads. Good posts by CC and SP.
 
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