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Market Structure Books/Resources

I’m looking to dig deeper into market structure and was wondering if you could point me in the right direction. I’m trying to get a better understanding of the nuts and bolts behind the market as well as a deeper dive into the different participants, their motivations, and the ways that they transact (different order types, responsibilities of market makers/specialists, etc.).

I’ve heard good things about Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris but am not sure if the content is stale (published in 2002) with the more recent increase in HFT. I was also looking at the Series 3 Exam Review Study Guide, but the reviews on Amazon for it aren’t great and I wasn’t sure if this would have the type of information I’m looking for. Would you recommend either of these, or do you have any other ideas/suggestions?

Sorry if I’m a little vague in what I’m looking for here, but this is a subject matter that I really don’t know what I don’t know so it’s a bit difficult to articulate.

We are sorry for the delayed response, but we hope you understand that these are very volatile times due to the COVID-19 “coronavirus”.

It is a good step that you are trying to get a better understanding of the different players in the marketplace. Especially during such strong uptrends and downtrends, it is important to know why and how institutions accumulate positions and how they liquidate positions and transfer to cash. However, the knowledge of how any particular player behaves should not affect your personal risk management plan.

If your positions are going against you, you need to act following your own method and not try to speculate on how a specific player would react.

Here are some of the players I am thinking of:

  1. Hedgers - These players are typically not concerned with direction per se, rather how many contracts they should adjust relative to their cash positions, whether in physical commodities (Oil, Wheat, Cattle, etc.) or financial futures (Currencies, Stock Indices, Bonds, etc.). Many refer to the adjustment between cash and Futures as Basis. I believe that this group is the largest one in the marketplace. After all, the Futures market was created for hedgers. This group (usually) is always long or short based on their cash positions. For example, a refinery that is about to buy Crude Oil and may be exposed to higher prices will be long the CL. On the other hand, those who extract oil and need to sell it are susceptible to lower prices and will be short the CL.
  2. Speculators. The sophistication of the speculators can range from small at-home players to HFT shops with low latency execution. Although they vary in their knowledge, they all have the same goal, which is simple-Gain $$. Also, the use of technology used by these groups can vary from subpar milliseconds and nanosecond low latency HFT execution to the milliseconds that most online traders use.
  3. Market Makers - They are responsible for continuously quoting prices at which they are willing to buy and sell Futures. CME lists them here https://www.cmegroup.com/education/market-maker-directories.html
    During times of HFT Flash crashes, market makers may not be willing to provide deep liquidity, which may impact the bid/ask spread. No retail traders should be in the markets at times like these.
    The reality is, that despite all the players, you need to focus on your own risk management. Different forces may pull the market in different directions, and since different players have different interests, it may affect volatility that the average trader may not be able to sustain. Use your discretion in your decision-making.

I hope this gets you on the right track.

Thanks,
Matt Z
Optimus Futures