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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Joseph Silent who wrote (16904)	9/21/2003 12:19:51 PM
From: Dan Duchardt	Read Replies (2) \| Respond to of 18137

I think you might do better with a change in nomenclature. Instead of your t1, t2, t3, t4, Q1, t5, t6, Q2, ..... I suggest using Qm to identify quotes, and tm;n to identify trades associated with that quote. You might hope for a simple sequence of events: Q1, t1;1, t1;2, t1;3 Q2, t2;1, t2;2, ... t2;10, Q3 ....... As others have stated, it is not always that simple. Most automated trades occur at the current bid or ask, but the market has depth so as soon as one level is taken out there is a new level to replace it. Frequently, there are more orders than needed to take out a level, and if that includes enough limit orders both sides of the quote will move together. For example if the market is 10.25 x 10.26 with size 7 x 9 and a market order to buy 500 shares is followed by an unrestricted limit order to buy 500 at 10.26, the 10.26 will be taken out and there will instantly be a bid at 10.26 and an offer above. In that sense, filled orders "cause" the inside bid-ask to change. If there are no limit orders, one side might move before the other, opening the bid ask spread; then it depends on who reacts first with a limit order to close the spread. If there are a lot more “active” buyers (those sending new orders to cross with standing limit orders) than “active” sellers, the market can move up several levels. However, this does not change the fact that these automated trades occur at the level of a prior quote. Non-automated orders can occur at prices away from the inside market, and reporting may be delayed. Block orders often appear at prices that are away from the inside, either because the negotiated price is not at the market, or because the market has moved before the trade is reported. Then there is the fact that trades occur on many different systems, each of which has its own set of quotes. Not all of these quotes are at the inside market in the time and sales record you see. In addition to all this there is Jon's observation that quote streams and print streams are not always synchronized. Nasdaq gives priority to quotes, so it is possible for the print stream to lag well behind the quote stream. All you can know is that in the data stream Qm will appear before its associated tm;n. You cannot be certain that every trade corresponds to a quote you can see, or that a trade corresponds to the most recent quote. All you can do is assume that for the majority of trades, simple sequence is preserved and recognize that at times your assumption will be wrong. If you start seeing a lot of "small" trades that do not correspond to the most recent quote, it is almost surely an indication that the trade data stream is lagging the quote data stream.