If a market trades with regular volume of 20 lots a side, and trades fairly rapid fire throughout the day, you can bet your kids college fund on the fact that if a market then goes 2 lots on the bid and 80 on the offer and holds there for 4 x plus of a time period greater than the normal time of an execution without the small volume being given, that offer will be lifted pronto.

You can almost count it 1 … 2 … 3 … mine.

Victor Niederhoffer writes:

 This is a most interesting and creative observation that suggests many fruitful extensions. It may be the best way to show that volume matters - of course it's the opposite way from what is usually thought. Still, Justin Mamis had similar speculative insights.

Hanny Saad writes:

Very well stated and I agree with you [Craig]. Do you care to take a stab at what you think might be happening behind the scenes? 

Craig Mee replies:

There're probably a few options here, but certainly at times you do have one or two key buyers or sellers driving the market. When this happens, the small retail traders will lean against solid offers time and again. This will continue until a situation develops where the market has traded through several levels and where no more small sellers are there to be found, yet the one or two hungry sharks are still circling. Thus you get the situation, whereby we have only two on the bid (all retail punters are now already short or have been burned trying to lean against offers) and 80 on the offer. Thereby no one hits the bid, market holds, 1/2/3/ bang… the big fish can get size on and lift the offer….

So, in a nutshell, one reason this happens, I believe is due to one or two large corporations shipping in volume for a hedge (though I'm sure the list could offer other reasons). And if you have big enough pockets it can often pay to fade this move. Its not, however, always a smart move, unless you have a direct line to God.

Bruno Ombreux writes:

"[A]nd if you have big enough pockets in can often pay to fade this move, however its not always a smart move…"

That's one thing I've seen a few times when I was a professional oil trader. It is entirely anecdotic and not testable, but relevant to the subject. The nice thing about being a professional, is that one has people on the floor, and they comment on what's happening like, "Goldman on the bid for 10,000 lots."

Now, in the 1990s, 10,000 lots WTI was big size. And if it were Goldman, and not their commodity subsidiary J. Aron, it meant they were acting as brokers for a fund that was an outsider. When professional traders tried to move size, they rarely showed it that way. They worked it all day long, preferably through several floor brokers, to hide one's intentions.

What usually happened in bygone days, is that a lot of small people tried to front-run the 10,000 lots, on the theory that a big buy order is like a free call option. They probably expected it to be taken piecemeal, if it were to be taken, which would leave time to sell and get out if the size showed signs of being eaten away. And if the market went the other way instead of filling the order, it was free money.

But instead of the order being eaten piecemeal, we often got information like, "Hess just booked Goldman." Which meant a commercial filled the 10,000 lots in one go, probably for hedging purposes.

The market moved toward size and the result was that all the frontrunners saw nothing below, and got into a panic. It cascaded as they hurried up out of their longs and the market collapsed. It can be really fun if it happens a few minutes before the close.





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