Are You Trading With Or Against The Market Makers?

Most retail traders blame the Market Makers for their losses. The reality is that you are often trading against a Market Maker rather than with the trend of the market.  

To provide some background, I’ll give you a synopsis of one of my personal experiences with Market Makers.

Many years ago, I walked into our trading offices to see my business and trading partner, Howard, on the phone laughing and joking as if it was his best buddy. He quickly jotted a note to me. I read it and jolted. “The Market Maker?” I whispered. He grinned. I was speechless. My trading partner was talking to a NYSE Market Maker during trading hours.  How he managed that I will never know.

After the conversation ended, Howard explained that he wanted to make sure that what we were going to teach in our first ever 2-day workshop was consistent with Market Maker strategies. The Market Maker not only thought that Howard’s new order type was brilliant, he asked if he could use it on his trading floor. 

I was more concerned that everybody already knew what we were teaching. But that worry dissipated 10 minutes into my live training in a room packed with professionals, retail day traders and retail investors. 

That was over 25 years ago. We still use that unique order type today for teaching students, both retail and professional traders. There have been a few minor tweaks but it still works amazingly. Howard’s novel order entry method is still being used by professionals today. 

There are other stories, but for now let’s talk about Market Makers.

The Stock Market of the USA guarantees only ONE thing: for every buyer, there will be a seller and for every seller, there will be a buyer. That’s it. No promise of great, instant wealth. No promises of getting rich quick. 

When you trade, you need to understand the role of the Market Maker. The stock market is not a casino, it is a giant auction that Market Makers facilitate. 

There are 3 types of Market Making in today’s market structure:

1. Automated, Computer-Generated Make the Market Systems.

The US exchange computers adjust the pricing of every US listed stock before the US stock market opens on the East Coast of the US at 9:30 ET. The goal of adjusting the pricing structure seconds ahead of open is to prevent any arbitrage between global stock markets for retail investors and retail traders. This is a fully automated system that has minimal human intervention.

2. HFT Maker/Takers and HFT Market Makers.

High Frequency Trading, aka HFT, is automated programs that generate huge volumes of small-lot orders on the millisecond scale that convert to larger orders on the retail side's one-minute scale.  HFTs have been part of the market since 2002.  HFT algorithms are set up by humans but the orders are fully automated.

The role of these HFTs is to provide liquidity to the exchanges. Illiquidity is a major problem for the exchanges.  This is because of the Dark Pools, which are Alternative Transaction System (ATS) venues.  About 80% of all liquidity is off the exchanges in ATS venues. In the past few years, the major exchanges have opened up ATS venues to ensure they have sufficient revenues. So they have become quite huge.

3. Major Banks and Giant Financial Services Companies Approved for Market Making.  

JP Morgan Chase, Goldman Sachs, Citadel (also the largest PFOF, Payment for Order Flow market maker–retail orders are sent to them from retail brokers) are the prominent Market Makers at this time. There are others, of course. They have huge trading floors with the most experienced, savvy and skilled traders in the world.

Making the Market is required during stressed market conditions, when there is a VOID of buyers.

Recently, the market has encountered a VOID of buyers. This is not illiquidity, it is not volatility, it is an absence of major market participant groups buying. The lack of buyers creates a void, an absence of buyers, which are necessary to complete order transactions.  

Market Makers fill that role by setting up Sell Short Orders at appropriate price levels for that day’s open based on overnight order flow data from retail brokers. When there is a void of buyers, Market Makers use short orders, which can be canceled automatically if conditions change, and then establish the buy-to-cover price. This is based upon technical and fundamental data in a graphical chart format. The orders are then automated to trigger as the market opens.

IF you are chasing HFTs trying to sell short, you will lose money. The HFTs start buying to cover their short trades as soon as the stock gaps down at open.

IF you are buying or selling ahead of the market open and you have not done your due diligence in determining the current Market Condition, which is a Platform Market Condition, you will lose money. (There are 6 major conditions.)  

Market Makers are not watching for your 100- to 1000-share order or stop loss to take you out and then smile about it. 

There are 30 – 40 million transactions every day in the US stock market. The reason you are losing money is because you are unaware of what is happening on the professional side of the market. You are trading against the professionals.

How to solve this problem? Find trading education that helps you understand how the professionals trade. Look for a methodology that shows you how to identify their activity with the tools you already have. Visit my website to learn more about my unique approach to reading charts: Relational Technical Analysis. 

Martha Stokes, CMT

https://www.technitrader.courses/ 

 

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This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This contains sponsored content and is for informational purposes only and not intended to be investing advice.