Sunday, October 08, 2006

Who Controls the Markets?

In my posts, I have frequently emphasized that large market participants dominate the equity index markets and control its movement. My trade-by-trade analysis suggests that the largest 3-4% of trades (those over 100-200 contracts each in ES) account for well over half of the total volume in that market. Because volume correlates very highly with price volatility, the presence or absence of large traders in the marketplace is an important determinant of opportunity for the intraday trader.

Above we have a demonstration of how size controls the markets. The chart represents the S&P emini futures (blue line) over the past month. The red line is a cumulation of the ES price changes over the month that included only those one-minute periods that traded on twice (or more) the average volume expected for that time of day. In other words, the red line is price change solely attributable to time periods in which size has hit the market. These high volume occasions accounted for only about 11% of the minutes in the trading day.

The two lines correlate almost perfectly: .96. Essentially all of the movement in the ES can be accounted for by the small number of periods in which large participants have entered the market. When large locals and institutions are not in the market, the market--for all practical purposes--goes nowhere.

Many market indicators and technical analysis formulations treat each time period during the day as equivalent. An alternative--and promising--strategy is to separate signal from noise by analyzing only those time periods in which large participants are present.

My data suggest that fully half of all ES trades are one and two lots that only account for 3% of total market volume. In a very real sense, over half of everything that occurs in the equity indices doesn't matter. The key is focusing on the trades--and traders--who do move the markets.

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yinTrader said...

Hi Brett
An alternative--and promising--strategy is to separate signal from noise by analyzing only those time periods in which large participants are present

I guess this is why it is hard to make money from day trading, partly because the timeframe is susceptible to noise and psychologically, space for decision making is compressed.

Brett Steenbarger, Ph.D. said...


I think you have a good point, yet it's unclear to me that this is a pattern limited to daytrading. Large volume may well control price movement at longer time frames as well. That's something I'm in the process of exploring.


Bert Hancock said...

Brett, pardon my redundancy, but this is another fantastic piece of info, IMO.

While your study is of the ES, have you determined if a similar finding is valid for, say, individual stocks, or would they tend to be less/more influenced by "big guys?" And maybe that's even dependent on the type of stock--maybe the smaller cap ones are less influenced by larger institutions and such?

Brett Steenbarger, Ph.D. said...

Hi Bert,

You raise an interesting question that I have not investigated in depth. It is very likely that individual stocks differ significantly in their volume makeup, with less size in small cap and bulletin board issues. Not only is there less participation among large traders, but also less presence of program trading and hence greater trending. This is a very worthwhile area to investigate.


davidino said...

Hi Brett,

Great exploring. Can you tell me the time frame of such big volume trade taking place? My finding is that big guys can jump in anytime not the usual first and last hour of the trading day. Even in lunch time they come in and make the attack to reverse the market.

Brett Steenbarger, Ph.D. said...


You're correct; those volume bursts can occur at any time, but do tend to occur more in the NY early AM and late PM hours. I generally like to enter a market *after* such a period has occurred, when I can see if it is being followed by further volume (and might be part of a directional move) or whether it's an isolated event (and is more likely to be reversed).


robin said...

Hello Brett,
Loved your books, especially the second- seemed to help me the most. Can you explain a bit more on using Market Delta? Is it clear when institutions jump in using this charting? I would like to trade the 30 year bond futures by fading moves for scalp purposes but I know I need something to gage volume, and not just total volume. do you know of any other volume measuring charting that might help or do you believe Market Delta is it? Thanks, Robin.

Brett Steenbarger, Ph.D. said...

Hi Robin,

I do find Market Delta very helpful for tracking the behavior of large traders, although most my experience has been in stock index futures, not bond futures. Other platforms that track volume at bid vs offer include CQG ("trade flow") and Ensign Software. Best of luck--


dmitry said...

Hi Brett,

Pardon for this intrusion on a two-year old post. First, thanks for great book - Enhancing Trader Performance.

I daytrade ES and by looking at the DOM, I see big volume showing up on market depth only to disappear few seconds later and the move it caused will lose steam most of the time. IMHO, the whole trading comes down to recognizing when this big volume comes in to stay and move is genuine or when it is a fake.

Markets are counter-intuitive and opposite to conventional logic because the minority which controls the markets is against the majority (which lacks knowledge/right information and enters the market by conventional wisdom) thus the minority has to push the markets in the direction opposite to what conventional wisdom dictates and separate as many "conventional wisdomers" with their money as possible.

Only naive people think that markets are efficient all the time.

Trading could be done in two ways:

1. The only way for a small guy to survive in this arena that I know is to develop recognition of certain very simple chart patterns and develop dynamic trading system around it with complete money, risk and trade management around it.

2. The other route would be to try to learn or find the right tools to recognize the behavior of market movers and follow their moves or fade the move as soon as they are gone. I would assume there are no such tools exist (I am not aware of any myself). It also seems logical to assume that market movers will come in and move at odd times without any recognizable pattern to their action as good timing for moving would arise randomly depending on each current and unique market situation.

Lets imagine that I am big player X and you are a big player Y and we both have the most expensive equipment and the best possible market info money can buy which tells us when is the most favorable time to make a move. This raises the question - As far as I know, CME stopped providing counterparty info on SIFs in 2006. Is it true for all or can big boys with big bucks see this info?

Are you aware of any tools/methods/systems that can gauge market movers behavior?

Any new info on this subject in general since the posting in 2006?

dmitry said...

Hi Brett,

Any comment on my previous post?

I have found this interesting article:

Best regards

Brett Steenbarger, Ph.D. said...

Hi Dmitry,

The tools that I'm familiar with to gauge trader behavior close to the market are money flow analysis and Market Delta. Both look at the location of transacted volume, rather than the size of the order book.