This is one of the paragraphs from the book written by James Dalton, named “Mind over markets”. I have posted my questions below, after the paragraph.
“The initial balance represents the period of time in which the locals attempt to find a range where two-sided trade can take place—a range where both the buyer and seller agree to conduct trade. Locals trade mostly in the day
time frame and provide liquidity, not direction, in the market by acting as middlemen between the off-floor traders. Their purpose is not to
make one or two big trades every day, but to make a few ticks on a large
volume of trades. The local is typically responsible for over 50 percent
of the day’s trading volume.”
‘Locals’ is a term used in OTC market, right ? Is the ‘Local’ term still applicable in this era of electronically traded markets?
“Their purpose is not to make one or two big trades every day, but to make a few ticks on a large volume of trades. The local is typically responsible for over 50 percent of the day’s trading volume.” --------------------------Who are these locals in the present electronic markets ? Are they referred to as ‘Market makers’?
Every brokerage firms like Zerodha takes brokerage of a few ticks rather than making big moves. So is he referring ‘locals’ to brokerage firms like Zerodha ?
Most likely, the locals are large institutional investors who are often called Market Makers. The 50% of trading volume he referred to are basically proprietary high-frequency trading algorithms or trading bots implemented by these institutions, investment companies and Hedge Funds(which also includes FIIs).
These Automated trading bots basically analyze data such as market sentiment, volume analysis, chart analysis etc. and track small price differences to carry out automated trading to generate significant profits. Essentially these bots scalp for quick profits on large volume. They are responsible for about 50%-60% overall volume in Indian Markets. Since they contribute large part of their volume, we can understand just how important are these algo trading bots for maintaining the liquidity in the markets. Whenever you make a trade, there are high chances that you are getting matched up with these algo trading bots than the retail/human traders.
If you compare Indian Market($2.5 Trillion) with the US market(which roughly has a market Cap of around $42T) you will just see how minuscule our market is compared to them. But the point to be noted is that, Locals/HFT bots contribute about 80%-85% volume in the US market, so you can see just how vast their contribution is in the markets. The higher the volume contributed by these bots ensures the plethora of liquidity in the market.
To tell you an interesting fact, there was an incident where the twitter page of highly reputed news company was hacked and released a tweet saying the President of the US was assassinated, of course these bots picked up the news and quite literally crashed the stock market to its lowest for few hours before it was corrected. So there are some concerns with these bots too.
Thanks, but the author refers to these big guys as ‘Other time-frame participants’ right?
No idea. Haven’t read that article and don’t understand what ‘Other time-frame participants’ means.
Okay. No worries. Could you suggest me a good book to understand market makers?
Well, I am not an expert on that. I have knowledge on these aspects based on my experience and research. But if you wanna learn more about these ‘Market Makers’ there’s a book named ‘One Good Trade’ apparently it is the holy grail of proprietary trading. I have heard that book is a great read particularly if you want to be a day trader and understand how markets move. I haven’t read it but do let me know how you find it and what you learnt!