Market makers are professionals who make markets in financial instruments, such as options, currencies, and commodities. They are large financial institutions, such as banks and hedge funds, who compete against each other to provide liquidity to the markets by buying and selling the underlying assets, whether they’re currencies or commodities like gold or wheat.
Market makers usually offer their products at fixed prices and pay the difference between what they sell them for and what they paid for it if the market moves in their favor – this is called being at the money on an option trade.
There’s a lot of mystery and confusion surrounding market makers – especially when it comes to stop losses. People often wonder, can market makers see your stop loss?
Yes, they can predict your stop loss using certain direct and indirect techniques. They can see it through the Order Book, the Depth of Market, and the Level II window. This prediction always has a high accuracy rate.
Sometimes this information is made public, and sometimes it is not. But regardless of whether or not the information is released to the public, market makers always have access to it.
Understanding Market Maker’s Role
A Market Maker is essentially an electronic trader that simultaneously offers to buy and sell stock at certain prices. These traders are what facilitate liquidity in securities markets by always buying from sellers and selling to buyers. Markets depend on these dealers because they make money when the stock goes up or down.
They need to keep the stock priced within a range so that they can do their job effectively. In this attempt, they keep an eye on retail traders’ psychology and stop loss positions. If you haven’t taken any steps to protect your stop loss and profits, market makers will certainly predict it or see it.
However, if you want to protect profits or hide positions from other investors then it might be worth taking steps to conceal your stops.
If you’re trading stocks or ETFs, there’s a good chance that you’re using market orders. When a trade is matched with a matching order, the trade price becomes fixed, and the trade hits the exchange. With each new trade added to an exchange, there is an associated transaction cost for executing that trade.
Market Makers want to minimize their transaction costs by providing bids or offers at prices just below those of other Market Makers. Since you don’t know what the price will be when you execute your trade, it’s very important to place a Stop Loss order. That way if the price moves against you beyond what you expect, your losses are limited.
Why Market Makers Can See Your Stop Loss or Data
Market makers and other automated systems have access to order data, which allows them to protect themselves when making trades. A market maker cannot fill an order at a price lower than the best bid or higher than the best offer on the exchange, so they may utilize programs that automatically set buy and sell orders at specified distances away from the current trading price.
These distance points are sometimes referred to as stop-loss orders. When these points are hit, these programs will execute those stops automatically. The problem is that the market maker can also see your stops, which means you’re potentially leaving yourself vulnerable if you place a trade without adjusting your stop point accordingly.
Do Market Makers Have Access to Your Stop Loss Orders
As a retail trader, there is always a chance that someone else knows about your open orders and stop-loss positions. This someone is actually a market maker who is trading against you on the other side and does not have the same intentions as you.
Professional traders always have a mental Stop Loss Order in place that corresponds to a predetermined percentage or dollar amount (e.g., ‘sell if the price moves down 5%’) and never rely solely on your broker’s margin call because he may not be looking out for your best interests at all times.
If the market maker is not directly seeing your stop loss, he is in a position to predict it with high accuracy. They work on trading psychology and know when a trader will actually put a stop loss.
There are certain points or times in markets when stop losses are more vulnerable and market makers trap the traders here.
3 Points Where Stop Loss Is Riskier
There are 3 times during trading hours when your stop loss positions can be exploited by market makers easily. The reason is that they can easily predict most of the traders will put stop losses at this time.
- First half hour after just opening the market
- Busy trading hours between 12 to 1 with more transactions
- Just 15 minutes before the market is about to close
Market makers know that during high activity hours there is more sell orders. The spread at this time can be widened to disturb the ask side. Similarly, during midday activity is slow that tends to widen the spread on the bid side.
5 Protection Techniques to Avoid Market Makers to Exploit Stop Loss Orders
The more detailed your Stop Loss Orders are, the better you can reduce your risk ratio. Take the time to educate yourself and understand how the markets work so that you don’t find yourself in a situation where you made a mistake because you didn’t know better.
Know what will happen if you decide not to execute the trade, as well as know what will happen if you do execute the trade – no matter which way the result goes. Below are 5 techniques to avoid market makers exploiting your stop orders:
1-You can protect yourself from market makers by going through an intermediary like an ETF so no one will know what you’re selling or buying until it hits their desk and they’ll just know what they’re buying or selling when it hits their desk.
2- Dont use stop orders at all. It’s better to go for price alerts, or SMS alerts to warn you when the price reaches a certain level. In this way market makers cant hunt your stop loss orders.
3-Never trade during low volume trading hours. Many traders put sell orders here. It becomes easy for market makers to predict where they will put stop orders.
4-Using brokers who offer conditional stop orders can also avoid exploitation. This type of stop order is common in stock trading.
5- Many brokers offer hidden stop orders. They remain unseen until the price hit the level. To avoid manipulation always go with a broker who offers hidden stop orders.
How do I hide my stop orders?
The only way to hide stop orders is to go with brokers who offer hidden stop-loss features. This feature will execute stop loss only when the price limit is hit. Otherwise, it will never show your order on the screen.
How do market makers hunt stop orders?
Market makers are always in a dominant position over retail traders. They try to move the market by triggering stop orders of other traders. They always want to close before other traders stop orders. They try to force traders out of their position. They do in-depth market research for this purpose.
Market makers might be able to see your trade, but you can shield it by using a stop. It’s easy to do and can prevent things from going wrong for you in the middle of a trade. If you want to trade successfully you should try to think in the direction of market makers.
Be careful about sharing information that could give away your strategy or reveal how much money you have at stake in the markets.