market makers/specialists and orders

say you shorted a stock today at 20 and the day's high is 20.99. if you were to put a stop market buy order to cover at 21, do market makers/specialists know if that order is to exit a long or short position? for example, if i had instead gone long at 20 and put a sell limit at 21, would they be able to tell that my order is to exit a long position?

thanks

 

I do not think so; but why would you care?

 

i have another question about this....

there's a common belief that market makers like to shake people out of their trades by hitting common stop areas. for anyone who knows, is this true?

 

just for the sake of an example..picture this:

say today a stock's high is 50 and the low is 45. if 100 people shorted it today at 47 and all 100 put a stop to cover at 50.01 and there were 0 orders at 44.99, do you think market makers would try to move the price up to take out those stops? i would think yes.

also consider:

say today a stock's high is 50 and the low is 45. if 100 people shorted it today at 47 and all 100 put an order to cover at 44.99 and there were 0 orders at 50.01, do you think market makers would try to move the price down to take out those orders? i would think no.

i'm just wondering if i'm right...or if this is false common thinking.

 

Yes.

 

Yes.

 

Tom Baldwin said, "Every fill will be tested."

It's a basic market function.

 

I think this (stop running) happens alot. The thing to remember is you are really trading blind compared to the mm's and especially the specialist. As an example, if a mm has a order for size to buy and he sees, or suspects, there are stops nearby, why not run the price to stops, pick up some cheap stock, then run it up and sell. You can also see this on the S&P500 futures when you will get a small spike in one direction, usually near support or the high/low of the day, and then they take off in the other direction.

 

although i do not know for sure, i think it does happen.

it could just be coincidence, but yesterday...

first i have to say that i normally don't trade stocks with such low volume, but i think the stock i shorted yesterday only traded like 30,000 shares. anyway, i shorted the stock and a few minutes later i entered a stop to cover above the day's high. the bid was 6.50 and the ask was around 6.55 most of the day. i think the high was 6.65, so my stop was at 6.66. a few hours later i noticed that the bid was still at 6.50 but the ask was 6.65 now. having saw no real change in direction and the bid was still 6.50, i cancelled my stop order. a few minutes later the ask went back down. it just seemed kind of suspicious to me, but i could be wrong.

 

i think a large portion of this action is due more to simple market mechanics than to slickness or deception on the part of the market maker.

reversion to the mean applies on many levels. if a cluster of buy orders is hit below, then most likely the market will next hit the cluster of sell orders above. thus when there is more or less equilibrium in terms of order flow the market will have a higher tendency to seesaw between the spread than to go anywhere.

with sell orders above and buy orders below, the market maker is going to spend most of his time trying to exploit the structural gap that pays his bills, and will decrease the size of that gap in doing so. i don't think he is overly concerned w/ being a wiseguy.

also, smart off floor players like to get out at obvious breakaway/expansion points because they know there is usually more liquidity there to absorb their exit. Paul Tudor Jones, for example, mentioned he always tries to liquidate half his position at new highs. So if you are entering on a new high/new low, a lot of times you are cashing in the chips of other traders who are bigger/faster than you. Amateurs bet on breakouts, pros bet on mean reversion (not all the time but generally so).

i'd also like to see a study on the size of the average daytraders teeny little stop versus the average size throwaway move, i.e. if you are usually using a five cent stop but your market has at least a six cent farting around quotient, then guess what you are going to get blipped out constantly.

i'm no friend of market makers/specialists etc. I just think it's illogical to assign them as much power or as much blame as they get around here.


p.s. that's a funny picture Gekko, makes you wonder what he is thinking. maybe somth like 'hi there big boy, i'm not wearing any pants'