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it is statistically easy to find average liquidity and have
your system utilize that number for bet sizing that is if
you are trading size...
for rough approximation take total volume per day
and divide it by the number of seconds in session
you will get ave size per second. it's a very interesting
number to look at. gives you an idea what ave
liquidity is.
if a contract has 100k average daily volume and
trades 6 hours then aver volume per second it
about 100K / 60*60*6 = 4.6 contract per second
on average. you can also get real fancy and take
total number of ticks per ( tick volume ) and assuming
all ticks are same size approximate total distance price
travels per day. you can then come with ticks traveled
per second. say tick volume is 4000 ticks per session
that tell you that price traveled 4000*ave tick size
or .19 tick per second or 1 tick per 5 seconds.
than you can approximate ave volume per tick.
in this case since it take 5 seconds to travel a tick on
average then ave volume per tick will be 5*ave volume
per second or 5*4.6 = about 25 contracts per tick.
this number can tell you approximately how much size it
took to move price per tick... an important number
that should tell you "don't bid more than 25 if you don't want to
move the price a tick on average".
later on you can do lookback based liquidity
calculation since most of time in morning and towards
the close liquidity jumps compared to at lunch. so you
can do average liquidity per 1st hour. last hour and lunch
time. but you need intraday data for that. in the spoos
you can't do that but you can look at the tick volume
distribution during the day and extrapolate from daily
volume what the liquidity is now. or you can call the
floor and ask.
the bottom line is that you should not exceed that
number and that should allow you to hide your
size within the average size so that you don't flash
your hand.
in stocks it's easy to see on L2 or TOS what the ave size
is. another important consideration in stocks is
that up to about 3/4 of size in passive orders will
not getting executed...
meaning if you have total size at the bid 100K
and total size at the ask 50K and market is going
up the chances are that only about 3/4 or less of
100K at the bid will get executed. the rest will
remain unfilled whereas all 50K will get executed
at the offer. same stuff in the pits..
the most liquid market in the futures today is ED,
next is bonds but liquidity dropped a lot recently,
spoos are good but nothing compared to the above
and there are about 300-500 real liquid stocks on nasdaq
and about 100 on NY. Qs are the most liquid out
of Qs Spy and Dia. Dia is the least liquid on amex.
but the most liquid market in the world is of course
forex ( talking real forex not the bucket shop forex )
futures mag gives you liquidity rating in every issue
for the month.
for stocks do a scan on stocks with ave daily volume
of 500K or more, >10 on table top. that should
produce that 300+ list. real high liquidity stocks
where you can get 10k shares in one second are
not many, maybe about 10-20 stocks.
the most liquid naz stocks are csco, msft, intc, orcl, dell, wcom,
and remember the higher the liquidity is the tougher it is
to move the market. that's why ed has such tight range.
also as the stock price moves from one tabletop to a higher one
the liquidity will decrease as it take more margin to trade
higher priced market. as liquidity decreases the volatility will
increase. if liquidity drops to almost zero it means there is no
interest in this market ( not functional ) and becomes dead
market. generally the lower the liquidity the easier it gets
to move it but too low liquidity will not move the market at
all. the proper definition is lowest liquidity at highest interest
make moving price the easiest ( interest meaning total number
of participants ). if you try trading the stock with the size
much higher than average liquidity allows for a given time
frame you will have trouble getting in and getting out
in most cases without moving the price. sometime though
trading large size will get you better execution since market
makers are looking for large size to execute against. sometimes
you can have them pay for larger liquidity by bidding or
offering large size but outside of the market since large
traders can sacrifice a tick or two for the possibility of
getting in or getting out in size.
so large size sometimes attracts large size but sometimes
can induce panic.
and...
there is always a trade off. in highly liquid stocks you can
get in easily but they don't move much...
in lower liquidity stocks it's hard to get in but they move
well... :-) so there is no easy way...
on top of that market markers constantly compete with
traders for liquidity and induce liquidity in there favor.
there is fierce competition for liquidity in every market.
the key is trading is to get a good fill fast...
and as a final though, even the most efficient market today
which is Naz only about 1/4 or less of all passive orders placed
on inside bid ask get executed... the rest go unfilled.
for active orders it's the other way around.
it's even worse for other markets and the pits.
so even the best market is only about 50% efficient at best
and in reality it's less than that.
bilo.
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