Locked-in Range Analysis: Why most traders must lose money in the futures market (Forex) - страница 6

Capabilities of Market Makers

To understand the capabilities of market makers, one should know the limited market depth available to any participant: 1) Data featuring the nearest (best) placed 10 bid and 10 ask limit orders shows the price and number of contracts (Level 2). 2) Data featuring each transaction made shows the price, time, and number of contracts (Time & Sales).

CME Group market makers use the full market depth available to the exchange, namely:

1) Data featuring all existing placed limited orders

2) Data featuring all existing placed stop orders

3) Data featuring all open positions: price, volume, and side of order (buy/sell)

Figure 1. Net Positions (buy+sell) Market maker Order Book (Open orders, Open positions)

Market makers collectively create a market for each futures contract, centrally managing its common pool of positions to prevent conflicts of interest that would arise when working separately, when instead of earning the spread and self-quoting, market makers would get a large volume of positions that would not have a counterparty to close before the expiration of the futures. (Example: Speculator buys 1 cash settlement contract on the market, and his counterparty is Market Maker #1; then, the same speculator decides to exit the position and sell his contract; this time, his counterparty is Market Maker #2. As a result, the speculator does not have a position, and the market makers have 2 open positions that they can close only with each other; in this case, one of them will suffer losses).

Position Limits

CFTC monitors compliance with Commission or exchange speculative limits, which help prevent traders from accumulating large positions that could destabilize a market.

Table 4. Limits of max number of open positions by one account. Source: cmegroup.com

All Month Level / Single Month / Delivery Month will be calculated on a Net positions (the difference between total open long and open short positions in a given asset held by one account).

Reportable Positions

Clearing members, futures commission merchants, and foreign brokers (collectively called reporting firms) file daily reports with the Commission. Those reports show the futures positions of traders that hold positions at or above specific reporting levels set by CFTC regulations. When an individual reportable trader is identified to the Commission, the trader is classified either as «commercial» or «non-commercial».