FX Bank Manipulation Methods

How the banks were screwing their clients:

“We added markup to price quotes using hand signals and/or other internal arrangements or communications.”

“We have, without informing clients, worked limit orders at levels (i.e., prices) better than the limit order price so that we would earn a spread or markup in connection with our execution of such orders.”

“We made decisions not to fill clients’ limit orders at all, or to fill them only in part, in order to profit from a spread or markup in connection with our execution of such orders.”

Read more at Bloomberg.

Update September 2014

Hello, I am alive :) It’s been a while since I posted and a lot has happened.

My daughter was born two days after my last post – many sleepless nights since then!

My client work has become extremely busy. Projected to slow down through October and hopefully beyond. I’ve had enough of my client work. It’s easy money but time for money is the worst trade going. I’m going to take a solid break over December through New Year and then reduce my hours available for clients next year.

The trading bug is here to stay and I need to work this thing out. I am definitely making progress. No doubt about that. Here’s what’s happening my end with regards to trading.

Bund was really slow over May/June/Later? Got tired of wasting hours while it ranged 20 ticks. Became discouraged and felt that I needed a different style of trade better suited to my circumstances.

Have decided to split my finances in to three allotments. 1 – long term, 2 – short term discretionary, 3 – short term mechanical.

Long term is more traditional investment objectives. I realised that I’m always in a trade, whether I like it or not. Like most people, I get paid in a local currency, AUD, and then hold savings in a bank in that currency. The last few years this has been fine, AUD has been very strong on the back of China growth and global yield seekers. That story has begun to shift and AUD is not looking as solid as it once did. Therefore, I need to make conscious decisions about my savings. Hence the need for a long term account.

Short term discretionary account is where I play with ideas, and watch the market. The hours I spent watching the DOM were incredibly instructive and I believe has put me well ahead of the typical retail trader. To the point where I find it frustrating to talk to retail traders as most don’t understand the basics of the market auction mechanics. Anyway, the short term discretionary account is designed primarily to watch the market with trades in mind, and hopefully learn trades to a point where I can turn them in to mechanical systems.

Short term mechanical is where I build code to trade for me. At the very least I hope to have a system that screens markets and identifies markets in play to avoid the problem that I had watching the Bund for weeks doing nothing. At best, I hope to have a fully mechanical system. I’m going to start with the work from Ernie Chan’s books, and possibly Mark Fisher’s ACD system. I believe that I have a good understanding of the auction process and so hope to also build systems around the process such as fade consolidation ranges.

To be honest, I’m a little conflicted. I like the style of the SMB prop traders from the book One Good Trade. They screen the market for stocks in play, and then discretionary trade them based on trades they have seen work in the past. This seems attainable given my circumstances. The alternative is mechanical trading which falls to my strength as a professional software developer, but seems to have a less certain outcome. I’ll probably pass on the mechanical stuff for the time being and see how the discretionary trading goes outright, as it’s something I can test fairly immediately.

Besides internal conflicts, I’ve also had issues simply getting the trading business up and running. Some of the biggest troubles I’ve had have been to procure data, organise a broker, select markets to trade, etc. All that stuff that is necessary to the business of trading but so elementary that it feels like it’s not really progress once solved. Unfortunately trading from Australia with a family presents many logistical challenges. The european market opens at 2pm/3pm, US market opens about 10pm. Way too late for me. Asian markets seems like the only discretionary market available for me. On top of that, I feel like I need to cast a wide net irrespective of the bucket shops, flakey data feeds, and half baked trading software that I may snag.

After much pain and Googling, I’ve decided to trade the Australian Stock Market (ASX) . My previous concern around equities has been the required capital, data/software availability, and commission costs. I’ve decided to use Turbo Trader for the data, and IG for CFD brokerage. The benefit of going through IG is generous margin to remove capital requirement concerns, and the ease of going long/short. They also have a really simple but useful REST API. Turbo Trader provide access to a JSON web API (aww yeah!) which is not documented on the site. I only found it by accident after emailing to ask about DDE/RTD access. Commission costs are OK, not as good as futures which means I won’t be scalping, but acceptable at about the cost of one tick round turn – or five times as expensive as trading the Bund.

A couple of notes of caution. I was about to sign up for PhoenixAI but their sign up form failed. Then I emailed support about the failure and didn’t receive a response. PhoenixAI has some neat features with DDE/RTD support, but in the end they didn’t seem too professional. An honorary mention goes to the Spark platform from Iguana2. I trialled Spark and it’s pretty nice. They definitely have a focus on day trading ASX/NZX. They also support DDE but come in at twice the cost of Turbo Trader and their web API is considerably more expensive. I think Iguana2 has a superior product, but it’s not the best fit for me right now. For the sake of being complete, I also came across the following platforms with live data and seemingly acceptable UI: BourseData, CMC, Commsec Iress.

With my trading plan, there’s three key elements – screener to find stocks in play, the DOM ladder, and an execution module to manage trades placed on the DOM ladder through to IG. So the plan is to initially use the Turbo Trader UI for the screener component, and build a DOM ladder interface using the Turbo Trader web API for the Depth & Sales, Time & Sales component. I’ll connect the DOM to the IG trade API calls.

I’m excited by this new direction, and looking forward to plunging head first shortly.

Update April 2014

I’ve been focusing on scalping FGBL for a few months now. I’ve looked at FESX and some futures in the Asian market but I feel most at home with FGBL. There were some large rips going in to Easter which have made me a little uneasy though!

I’ve played with volume profiles, 1 tick and 3 ticks charts along side my depth and sales. These help me to integrate the large picture but take away from my focus on the D&S. I’m tempted to ditch the tick charts and either mark up my D&S with short term levels, or clear trades between moves. After watching the tick charts for a few weeks I feel like I’m more aware of what medium term signals I want to watch.

I’ve made significant progress in writing some code this month. I continue to underestimate this type of work. Code is relatively easy for me to produce and so often I underplay it’s value. This time I’ve created generic infrastructure that reads level 2 data and provides functionality to run trades against the data. This has given me huge flexibility.

There are many things I want to test and analyse but my first experiment is this…

Where are the optimal places to take a trade?

Pretty important one I reckon. The problem I have found is that I can pick the trend/movement of the price action pretty well, but I often miss the trade due to execution. It’s pretty easy to miss trades when scalping with limit orders.  So how do I get in at the correct time, what should I be looking for, etc.

What I’m doing with my code is taking a trade at regular intervals and tracing it’s progress until it either hits it’s stop loss or take profit. The hope is that I will be able to determine times when a trade had a high probability of getting hit and profiting. I also want to look at the potential to enter off market orders. I have many other questions but these are the broad queries.

The trick for me going forward is going to be:

  1. Focus focus focus. Keeping digging in to D&S and scalping. Ignore distractions, trading and otherwise (damn you Titanfall).
  2. Find confidence from my own analysis.
  3. Continue a process of self improvement as per Steenbarger.

Forward Guidance is Forward Guessing

Choice quote from a speech given by Richard Fisher from the Dallas Fed in Hong Kong.

Truth be told, although many of us have econometric models and all of us have a phenomenal team of economists who help us develop our projections, these estimates are, in the end, largely guesswork. Especially the further out in time they go. Yet the press and the markets focus on them as though they were the writ of all-knowing, all-seeing monetary sages.


Update March 2014

This year I have found my determination to make trading work for me. I’ve had an on/off relationship with trading for the last 10 years. At the start I was fortunate to have a colleague introduce me to the basics of trend trading forex with basic risk management. Unfortunately the idea of trading forex price action straight from candles never sat well with me. I couldn’t develop the confidence from that style of trading.

Since then I merely pottered around the trading industry. I built my web development business and became engrossed/distracted in that for a while. All good until I had my first baby and confirmed my disillusionment with the web industry (a post for another day). I moved back to a solo web development career and started looking at trading again.

Around September 2013 I stumbled across the Propex website, read their introductory PDF, and was referred to No BS Day Trading. I purchased the No BS basic material and was enlightened by what I read. It became clear that the information in the DOM was the level of detail that I needed to find confidence in a trade.

I ended up taking John’s Eurex webinar in early December to get a better feeling for how this “trading thing” works. I learned a lot from that experience and felt like I was on my way.

Since the start of 2013 I’ve been watching the DOM and charts religiously. Given my time zone and family commitments I’ve found the first two hours of Eurex open to work best for me. Organising myself and finding a routine has been a challenge but I think I’m there now. I’ve started to keep a diary and record each trading session. I’ve also begun a diary to dump my thoughts and determine my next actions. Staying consistent and developing a routine of continuous improvement has probably been the theme since the start of the year.

My focus has largely been scalping FGBL. I began to notice some patterns around previous day extremes in early February and this lead me to consider the same patterns around key levels. I wasn’t sure what those levels would be. From watching the DOM I had noticed that intra-day levels were constructed and produced similar patterns to what I had noticed at the previous day’s extremes. This lead me to auction theory.

I began to investigate auction theory and the application of that theory. I’m lucky enough to be in a chat room where some folks trade this style and it’s been good listening to their discussions. I’ve watched this movie from L2ST and there was some nice info about trading off auction theory and trading balanced vs imbalanced markets.

Then this morning I read this post about a prop trader’s enlightenment around scalping.

So this is my method: I just stare at the fucking screen and watch the bell curves forming on the side volume histogram. Once they are maturing, I fade the edges, and keep fading them. Then if some news comes, or i feel momentum is building in the movement( you can easily tell that if you are truly staring),  i switch from fading to going with it, and I enter before hand itself and anticipate the breakout of the range. That’s it really.

It feels like we’re on the same road. My feeling for now is that you can definitely trade by price action alone, but it can be made more effective by finding price action validation with correlated markets and auction theory.

Shredded Futures Orders For Early Price Notification

Some nice info described in a LinkedIn HFT group post. Scott describes how hit bids/offers are provided with an ACK packet before the prints or order book is updated. This means if you can get a sacrificial lot early in the queue and the rest of your order slightly behind that lot, then you can decide to leave or pull the rest of your order before other traders have the same information as you. Further posts in the thread say the CME is actively preventing this, but there are work arounds.

If there is 250 (size) on the bid (ES for example); with an institutional data feed you can see how many individual orders comprise those 250. You will normally see an average size per order of between 5 and 10; that means there are some larger orders mixed in with many 1 lots.

When an order fills, the owner of the order gets an ack from the exchange before the trade prints and well before (in HFT terms) the book size is updated. The owner of the order knows the price traded before everyone else.

So as you correctly state, the owner of the order pulls the rest of their (shredded orders). They can do this because they knew how many orders traded in front of that fill and if that is sufficient to give a statistical probability the level is going to trade through, they pull the orders.

This process can be repeated many times on the same price level if when placing the orders, a time delay is introduced between each placement (or possibly between a small group of orders). You may be 230 out of 250, 215 out of 250, 190 out of 250, etc. If you get to an order in your order stack that means too many orders have traded at the level for the risk profile the algo is using, the algo cancels the remaining orders.

The Trading Holy Grail

Here’s a great paragraph from the book Trading for a Living.

W.D. Gann

I gave up the search for the trading holy grail a long time ago. The more I look, the more that I see professional traders that simply find high probability setups and trade them. The setups are a combination of strength/resistance levels, trend lines, basic indicators like moving averages, and vwap.

The highly recommended book Street Smarts starts the book with a method that takes the other side of the well known turtles momentum trade. The idea being that most of the time the turtle trader loses more often than they win, but when they win they win big by catching momentum early. Taking the other side of that trade and keeping a stop loss would therefore suggest good results.

SMB covers a trade in great detail where a stock gets dumped, but then begins to trade up but gets stuck under VWAP. The reasoning for the resistance on VWAP is that brokers are scored based on their performance against VWAP. The SMB guys have really good content. Here’s the video of that trade.

The SMB guys also stress setups in their book One Good Trade. There’s a few rules but some of them include stocks that are up or down 3% in pre-market, stocks with exceptional news, expectation beating news, etc.

Don Miller looks for setups with a couple of seemingly basic indicators on tick and short time frame charts. The videos on his Trading After Dark site are worth a look.

Lastly, in this video below Anne Marie discusses using basic indicators to find places where others might be looking to make trades. The idea being that many people make decisions off the basic indicators. Specifically she mentions that she uses pivot points and stochastic momentum index.