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Trade like a market maker?

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Mark,

The problem with my spread order is that it is sent to the
market maker who supposedly provided the best price.

On the retail
front end, I can't see the market makers' quotes. Do you know how to
connect directly to liquidity (in a way that I can see MM's quotes)?

Another method I can think of is to come out with a good algorithm for
legging in. This is much complicated and I hope I would not need to go
this route. My opinion is, in order to get into more liquidity, I may
need to learn how to trade like a MM.

John

***


Hello John,

It's difficult to know where your orders are sent without asking your broker.  However, they are never sent to 'a market maker.'  The orders are send to an exchange, and that should be the one displaying the highest bid (or lowest offer).  Sadly that is not always true because some brokers accept bribes payment for order flow.

If you trade enough size, your broker will (gladly?) get a quote for your order.  When I was trading 100-lots of iron condors, I found that the people who provided those quotes were, to put it simply, out to cheat me.  In other words, when I tried to find liquidity, my broker (IB) could not have done me any worse than sending the quote request to the people they chose.

I no longer have access to such quotes (I trade much smaller size), nor would I seek them.  I know they are useless to me.  I blame IB for that (they asked the wrong 'liquidity suppliers' for quotes).

I look at the bid/ask spread for each leg of the iron condor as well as the bid/ask for at the iron condor itself. I then decide if I want to play.  If yes, I enter my order at a price I will accept.  If I don't get filled, so be it.

A few years ago, whenever I entered an order, the IB software showed (for 2-3 seconds only) a counter offer.  In other words, I had the ability to see the true market.  That allowed me to enter a low-ball bid to see the true offer.  That service is no longer available, and we are flying blind when entering orders.

I complained to IB that in reality, I am the market maker.  I am posting a bid (or offer) with no ability to see the true market.  "That's not fair" I tell them.  "Too bad" say they. 

So, I play market maker and hate it.  To  make matters worse, IB charges a fee to cancel an order and replace it with a better order.  Imagine – they charge me, the true market maker in this scenario, to make a better market.  It costs me cash to raise my bid or lower my offer.  It's an obscene system, but I don't see how I can do anything about it.  The overall cost to trade at IB remains untouchable for me.

If readers have suggestions or a work-around, please share.

IMPORTANT: 

1) You will not find a good algorithm for legging in.  In my opinion, there is no such thing.  You would have to know which way the market is moving to leg the first side of the trade.  And if you can get that part right, why would you 'waste' a good trade just to complete the iron condor?  Use that (impossible to build) algorithm to day trade and make millions.

2) You cannot trade like a market maker.  You are never aware of large orders that are being quoted.  You don't know anything about large spreads that are being shopped or sitting with the specialist.  Many times just knowing an order is there allows you to make a trade and then go get a piece of that large order.

You never get to buy on the current bid – and if you do, you will discover that it is no longer the bid and may even be the ask price when you are filled.

There may be books that explain how a market maker trades, but the MM's advantage is not available to you.

792


Em_1009 

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