Liquidity Mirage

http://www.tradingclinic.com/downloads/lm/lm_20061023.htm

If you want a copy of my article then its in the October 2006 Futures Magazine and last nights Liquidity Mirage was a timely reminder

Alleyb, got the following error when clicking on the link:

Not Found
The requested URL /downloads/lm/lm_20061023.htm was not found on this server.

Apache/1.3.34 Server at www.tradingclinic.com Port 80

same error here

Looks like you left off the last L, I think this works:
http://www.tradingclinic.com/downloads/lm/lm_20061023.html

I've just watched the first 10 minutes of your video (as an aside, Camtasia can capture just the window instead of your entire desktop which might help with your next recording).

This liquidity mirage that you talk about in these terms is definitely not what I would call a liquidity mirage. There is no illusion, attempted illusion or implication that liquidity will be in the market at that time of day. This happened outside of RTH and even novice traders know that there is no liquidity then. I have previously done a forensic blow by blow post-mortem of one of these spikes in The Anatomy of a Spike.

That is not a liquidity mirage in your video presentation.

By the way, in the discussion of electronic versus pit it is interesting to note that by implication there was zero liquidity in the pits at that time of day because there was no one in the pits to trade.

thx DayTrader for correcting the link
I did the video as a window but somehow at the end it moves the window and included the desktop. There is nothing on my computer I would not want anyone including the secret thought police to see so for the moment until I get better with the camtasia software I guess it's something we shall just have to live with. Sorry the production is not slick and glossy!
I won't argue about whether it is a liqudity mirage or not the facts are

1. The trades stand and will not be “busted” by the CME® exchange. This in itself is good because it gives confidence to all the traders that so called unfair extremes which in the past have been cancelled by the exchanges will perhaps in future stand on the basis - if that’s where the price had to drive to to find support/resistance then that must be a fair reflection of market value and therefore allowing price discovery to be the determinant of ultimate price. This is the oldest form of Caveat Emptor or buyer beware.
2. The trade occurred at 17:26 CET on Sunday evening October 22nd 2006 as the new week began trading in the Asian hours. The real move began as the S&P500® December Futures contract reached up from 1375.70 to 1380.8 with a buy order lifting all the offers. Once the print in the big S&P500® contract traded 1380.8, which represented a trade 0.6 above the previous recent high of 1380.2, this triggered orders from CTAs (Commodity Trading Advisors) who had placed resting orders to buy and sell on stop based off their proprietary black box systems. This created a dominoe effect that only came to a halt once sufficient movement in price had occurred with the relevant quantity to fill all the buy orders resulting in a massive surge of 25 figures taking the contract to 1399.
3. By 17:31 CET the whole world had woken up to the trade and the market was back at 1377.4 having traded less than 1000 cars or contracts with a face value of approx $350 mln and likely as not had transferred approx 25 million dollars of equity from the losing accounts to those whom had correctly read the market move taking into account the moves that also occurred in the e-Mini™S&P as well as Nasdaq-100® and Russell 2000® indices.
4. The bad element of this type of trade is that more and more the opportunity to try to push and therefore manipulate the market will be tried by unscrupulous dealers in the hope of profiting from the stops. This is purely a function of the moments within the 24 hour clock where there are pockets of inactivity punctuated by sharp moves due to the lack of opposing orders. In the exchange floors locals used to provide this liquidity but in the electronic world their skills are sorely lacking resulting in far greater movements than would normally have occurred without the advent of 24 hour trading.

There is a feeling from many in authority that the electronic world creates a better audit trail. I contend in fact that it becomes far easier to hide manipulative practices and becomes more difficult to prove and so the Liquidity Mirage will continue until eventually a crack appears in the systems. By that time it may very well be too late for the authorities as the avalanche unleashed of orders will take precedent in managing risk exposure. In other words it will be shoot first and ask questions afterwards.

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Originally posted by alleyb

...Tthe trades stand and will not be “busted” by the CME® exchange. This in itself is good because it gives confidence to all the traders that so called unfair extremes which in the past have been cancelled by the exchanges will perhaps in future stand on the basis

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And this is how it should be. Traders must understand that a market order can be filled absolutely anywhere and a limit order can be filled at anytime. If that is not understood and accepted then that trader must remain outside the market until the rules are understood and followed. Including the consequences.

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This created a domino effect...

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This has happened many times before and will continue to happen in the future due to fat fingers, general errors, mis-programmed automated systems, and traders deliberately running the stops.

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.The bad element of this type of trade is that more and more the opportunity to try to push and therefore manipulate the market will be tried by unscrupulous dealers in the hope of profiting from the stops.

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I disagree with you. In a free market society, if opportunity presents itself in the form of a traders ability to make excess profits then it will draw in more traders of this type until the market balances itself. There will be opportunistic traders on both sides. In other words, if stop running becomes profitable business then traders will regularly run the stops during light liquidity periods to the point that there will be no resting orders placed to run or until it draws in a large enough "other side" market to balance it out. We know that 99% of the time the market will return back to the starting point after a stop run in a light market. So there will be traders attracted to the market not only to run the stops but also to enter at the extreme and trade the market back to the original price. The "other direction" (re-balancing) traders will be trying to get in front of each other and in effect provide the liquidity to balance the market and return it to fair value. As what happened in this example.

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In the exchange floors locals used to provide this liquidity but in the electronic world their skills are sorely lacking resulting in far greater movements than would normally have occurred without the advent of 24 hour trading.

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So with the improvement in skills of these new electronic traders are you saying that this will happen less often? Or are you saying that the floor traders have not been able to adapt (yet)?

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There is a feeling from many in authority that the electronic world creates a better audit trail.

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I agree. An average computer programmer can write a script that will trawl CME's database of trades and produce any type of report that the auditors wanted to see to check for manipulation. Remember that the statute of limitations is (I think) six years so the authorities have a long time to seek out the wrong doers. If you take a look at the online gambling software that is being developed and look at the anti-collusion techniques and also at the retail industry and the data mining that they do there is a lot of software and software techniques to find anomalies and suspect activity in any database. Electronic traders who break the law will not last long.

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I contend in fact that it becomes far easier to hide manipulative practices and becomes more difficult to prove...

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In light of what I said above, how?

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...it may very well be too late for the authorities as the avalanche unleashed of orders will take precedent in managing risk exposure. In other words it will be shoot first and ask questions afterwards.

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