Know When Trading Volume Is Inventory Cycling By Market Makers

For years market-makers have "made markets" while simultaneously trading their inventory, a term I've coined "inventory-cycling",

which occurs when a market maker wants to "rebalance" inventory just like a physical store managing its goods-on-hand. When outside buying and selling wanes, there is also the opportunity to trade directionally.  

The order book all but vanishes beyond the top-of-book in the absence of outside buying and selling. Thus prices are impacted asymmetrically by size when one side of the book gets clobbered.

I've seen fake buying and fake selling used as terms to describe the types of moves mentioned above. While trading 6A last Thursday, I witnessed both fake buying and fake selling. So what better way than to use recent trading to illustrate this behaviour.   

How am I identifying these moves?

Experience gained from years of full-time intra-day trading has been key to recognising the advances in program trading antics. However, the specific tools and skills come down to the following:

1. I must know the "big picture" narrative because from here, I can develop highly probable scenarios for the upcoming session. In my experience, market makers share the same narrative as me, making detecting their sophisticated antics less puzzling.

2. Reading the tape (DOM or price ladder plus time and sales) highlights a market-maker's dominance relative to non-market making participation.

3. The presence of program trading (market maker or otherwise) can often be detected by monitoring common quantitative studies such as anchored VWAP, regular VWAP and numerous deviation calculations, etc.

4. So with a correctly aligned narrative, knowing the degree of market-making dominance and knowing the levels targetted, I've learned to identify algorithmic patterns observing the "footprint", using a myopic setting.

5. Notice I don't reference charts? I do look at charts, however. By mentally anchoring my other observations and detections onto a chart, my recall is accurate.

Narrative

No recent changes in fundamentals.

While a medium-term downtrend remains intact, the market is trading in a complex phase as per EOD view April 7.

Catching out traders is a misunderstanding regarding the market low April 1. Based on relative value, that's insignificant, while the lows of April 2 are anchoring the market to the upside now. 

And the trap, the shift in value to the downside during the previous 24 hours, sending a message to traders the market is accepting lower and lower prices. 

An excerpt from my pre-planning April 8 is shown below.

The reference to "having a few goes" relates to the fake selling, which achieved two things:

1. Repeatedly failing to move to the upside enticed new longs to reverse and new shorts to initiate

2. Facilitates insiders building a long position

3. Being aware of 1 and 2, I focused on building a long position, knowing to avoid being offside, several long-and-scratch repeat cycles were likely, unlike the competition who reversed longs to short positions (hook line and sinker)

Note: if it wasn't for identifying the most likely scenario was a move to the upside, I could have misinterpreted the fake selling as fake buying and being wrong-footed. 

If we follow the chart below chronologically, once Hong Kong's market commenced trading, you'll notice:

1. non-linear movement as liquidity vanishes (melt-ups and rug pulls)

2. market makers started trading in the "no go zone" range previously not accepted by outside buying and selling

3. reacting to melt-ups and rug pulls, retail is net short

4. market maker inventory is long

I sized up the trade when the market accepted trading above 0.7615. I took all profits into retail buying just below 0.7641 for a large payout. 

For further reading on evidence multiples, see A hack to overcome overtrading