Rajandran R Creator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Building GenAI Applications. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

Understanding Market Maker Moves During Big Announcements: A Guide for Short Term Traders

3 min read

Have you ever noticed how the stock market seems to get a bit chaotic around major announcements like central bank policy updates or significant company earnings reports? Prices swing unpredictably, and it can feel challenging to make informed trading decisions. If you’re a trader or investor curious about what’s happening behind the scenes, you’re in the right place. Let’s demystify the role of market makers during these turbulent times and understand how their actions—and the technology they use—can impact your trading experience.


Who Are Market Makers and What Do They Do?

Market makers are like the facilitators of the financial markets. Their primary role is to provide liquidity, ensuring there’s always someone available to buy or sell a security. This makes it easier for traders like you to execute transactions quickly and at prices reflecting the current market conditions.

Types of Orders Used by Market Makers

When providing liquidity, market makers primarily use limit orders:

  • Limit Buy Orders (Bids): Orders to purchase a security at or below a specified price.
  • Limit Sell Orders (Asks): Orders to sell a security at or above a specified price.

By using limit orders, market makers set the prices at which they’re willing to trade, helping them manage risk and maintain profitability through the spread—the difference between the bid and ask prices.


Are Market Makers Manual Traders or HFT Traders?

In today’s fast-paced markets, most market makers are not individual manual traders but operate using High-Frequency Trading (HFT) algorithms. Here’s what that means:

  • Automated Trading Systems: Market makers use sophisticated computer programs to execute trades at incredibly high speeds, often measured in microseconds.
  • Algorithmic Strategies: These algorithms can process vast amounts of market data in real-time, allowing market makers to adjust their orders almost instantaneously in response to market movements.
  • Human Oversight: While algorithms handle the execution, human traders and analysts monitor the systems to manage risk and make strategic decisions.

Why HFT Matters in Market Making

  • Speed: High-frequency trading allows market makers to update their orders quickly, which is essential during periods of high volatility, like around big announcements.
  • Efficiency: Automated systems can handle large volumes of trades more efficiently than manual processes.
  • Risk Management: Algorithms can be programmed to follow specific risk parameters, reducing the likelihood of significant losses due to human error.

The Cancellation Frenzy Around Big Announcements

As major announcements approach, these HFT-powered market makers often start canceling their existing limit orders at a rapid pace, sometimes every few milliseconds. Here’s why:

  1. Risk Management: Big news can lead to sudden price swings. By canceling orders, market makers reduce the risk of being caught on the wrong side of a trade when prices move unexpectedly.
  2. Anticipating Volatility: They expect increased market volatility and want the flexibility to adjust their pricing quickly in response to new information.
  3. Information Disadvantage: There’s always a chance that some market participants might have access to information before it’s widely released. By pulling back temporarily, market makers protect themselves from potential losses due to this asymmetry.
  4. Rapid Repricing: Once the announcement is made, they need to update their limit orders to reflect the new market reality swiftly.

How Does This Affect You as a Trader or Investor?

Understanding market makers’ behavior—and the technology they use—during big announcements can help you navigate the market more effectively. Here’s what you might experience:

  • Reduced Liquidity: With market makers canceling orders, there are fewer bids and asks available. This means it might be harder to execute your trades at desired prices.
  • Wider Spreads: The difference between the buying price and the selling price can widen, increasing your transaction costs.
  • Increased Price Volatility: Prices may jump around more than usual, making it challenging to predict short-term market movements.
  • Slippage: Your orders might get filled at prices different from what you expected, especially if you’re using market orders.

Tips for Trading During Big Announcements

Here are some strategies to consider when trading around major market events:

  1. Be Cautious: Consider whether you need to trade during these volatile periods. Sometimes, waiting until the market stabilizes is the safer option.
  2. Use Limit Orders: Limit orders give you more control over the price at which your trade is executed, helping you avoid unexpected price swings.
  3. Stay Informed: Keep an eye on economic calendars and news outlets so you’re aware of upcoming announcements that could impact the markets.
  4. Manage Your Expectations: Understand that increased volatility and reduced liquidity are normal during these times. Plan accordingly.
  5. Avoid Emotional Decisions: Big announcements can trigger emotional reactions in the market. Stick to your trading plan and avoid making impulsive moves.

The Bigger Picture: Why Market Makers Use HFT and Pull Back

While it might feel frustrating when market makers pull back liquidity right when you need it, remember that they’re managing their own risks using advanced technology. By temporarily stepping back during high-volatility periods, they ensure they can continue to provide liquidity in the long run. Without market makers—and the efficiency provided by HFT—the markets could become much less efficient, making trading more difficult and expensive for everyone.


Conclusion

By understanding the role and behavior of market makers—and the fact that they’re powered by high-frequency trading algorithms—you can become a more savvy trader or investor. Anticipate changes in market conditions, adjust your strategies accordingly, and use the tools at your disposal—like limit orders—to navigate the volatility.

The next time a big market event is on the horizon, remember to consider not just the news itself but also how the market makers and their algorithms might react. This insight can help you make more informed decisions and potentially improve your trading outcomes.

Happy trading, and may the markets move in your favor!

Rajandran R Creator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Building GenAI Applications. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

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