Queue Position


No matter what market you trade, if you want to enjoy sustained success, you need to
understand the mechanics of the market; how it works. In the old days of pit trading
for example, in order to get the best trades, a market maker needed to have a good
position in the pit and be on friendly terms with as many brokers as possible (I think I
usually failed on both these!). When futures moved to the electronic format, when
you get filled now depended on queue position (potentially a fairer method). If there
are currently 100 on the bid and you place an order to buy at the same price you will
be 101 in the queue.
Note here how on CFD and FX platforms you typically have no idea of where you
are or how and when you will get filled. As a professional trader I find this lack of
transparency to be a significant disadvantage to me hence another reason why I don’t
trade those products.
Chart traders, indicator traders and in fact the vast majority of retail futures traders
tend to set their orders to various price levels. For example, they want to buy at 15.
Alternatively, if they get a signal they might just go to market with their order. Either
way, they are not looking at queue position and this is one area where we will start to
differ greatly from them.
I will expand on the issue and use of queue position across the coming chapters but to
start with let’s look at what I hope is a clear example of its importance.
Let’s say there are a 1,000 lots on a 15bid. From a scalper’s perspective, there is a
huge difference in being number 1 of the 1,000 compared to being number 1,000 of
the 1,000.
At number 1 of 1,000 we can get a quick fill; even more importantly we can get a
quick fill by a small trader (say someone selling 2 lots). Once filled we have
hundreds of lots behind us that we can use to scratch the trade against if we don’t like
conditions after the fill.
At number 1,000 of 1,000 you cannot get a quick fill from a small trader. The only
way you can get a quick fill is if someone comes in and sells 1,000 lots and if that
happens we probably don’t want the trade! Further even if we did get a quick fill, if
there is no-one behind us, we have no-one to scratch to once we are filled.
From a market maker’s/scalper’s perspective there can be significant edge being 1 of
1,000 but no edge in being 1,000 of 1,000.Note, this is irrespective of the price.
So a price/level trader might say something like ‘I want to buy 15s’ and will place his
bid accordingly. Whereas we might also want to buy 15s but if there are already
1,000 on the bid we will avoid the trade.
So queue position is an essential part of our decision making.
We want to get filled quickly; we want the ability to get filled by smaller traders (or
the ebb and flow of normal market activity); we want the ability to scratch the trade.
A fair question at this stage would be “but when you place an order you are always at
the back of the queue, so you don’t have anyone to scratch too?” This is true but there
are two points to make here. First, particularly in slower moving markets, it is a good
idea to see if anyone has come behind you in the queue after a couple of seconds. If
the answer is ‘no’ then you may want to pull the order. It is also the case though, that
the way we judge value, the way we trade on a trade by trade basis means we will see
opportunities before other traders. Because of this we should not be concerned with
being early in the queue or being on a short queue. It is more worrying to be at the
end of a long queue than at the end of a short queue.
This last point is one where some retail traders may feel some discomfort over.
Typically, retail traders seem to be happier being at the end of say, a 400 lot queue
than being at the end of a 80 lot queue. But depending on the average trade size of my
market (discussed next chapter) I am probably usually happier on the 80 lot bid than
the 400. The reason being that I highly value a quick fill.
This point about a quick fill might be new to most readers so I’ll explain where the
idea comes from.
For decades market makers have known the value of being filled quickly. It isn’t
enough just to get filled on your bid or offer, you also want to be filled quickly. A
slow fill could mean trouble. I’ll give a couple of examples to demonstrate how and
why the idea of a quick fill has been implemented.
First, from my time trading in the option pits on LIFFE. When brokers came into the
pit and asked for a price from the market makers, that price was live for just a few
seconds. If the price had to be relayed back via the booth to a trader in an office, this
process could obviously take some time, maybe a minute or two. If the trader on the
other end of the phone wanted to trade on that price he would instruct the broker to
do so. However, when the broker came back to the pit to trade, he would need to ask
for the price again. He could not just trade on the price given a minute or more ago.This provided, market makers with an opportunity to change their price but the main
advantage for market makers was that they couldn’t be held to an old price and old is
anything over a minute.
Similarly, during my time on the market making desk for Convertible Bonds at ING,
when a hedge fund requested a price from me, he had literally just a few seconds to
act on it. After around 30 seconds if we had heard nothing I could call the price ‘off’
meaning he could no longer trade. There is a good reason for this, it protects the
market maker from a large player ringing round to other market makers at the same
time and trading on the highest bid or lowest offer.
So, in different circumstances, market makers had the same conclusion that after a
certain length of time, they would no longer want to trade. It wasn’t just the price that
was important, getting a quick fill was essential too. The longer you waited to get
filled the more likely it was you were going to lose. Getting a quick fill in particular
was a way to protect yourself from being hurt by a big order. We can’t eliminate that
threat but we can reduce it.
There is a good reason why this technique is not widely known about among retail
traders it is because their ‘educators’ have never traded as market makers. Only those
with proper market making experience will know of this idea.
So queue position is an essential ingredient in our decision making because it relates
to us being able to get a quick fill. We do not want to trade if the fill is slow.
If after a few seconds (the exact length will depend on the market and the session) we
have not been filled and we think we should have been (given the usual order flow),
then we will cancel the order.
But there is more to queue position! Not only do we want a quick fill on the entry but
we should also be looking for a quick fill on the exit.
Let’s say that we are trading a slow moving market, one that moves 1 tick at a time
but we are happy to take the potential 1 tick profit. We are looking to buy on the bid
and see thee are only 50 lots there which we like; it means we can get a quick fill.
However, we must also look at the offer to see how many are there. If for example,
there are 1,200 lots on the offer, we would not be able to get a quick exit. We must
apply the same rules to the exit as we do to the entry. We want to be in and out of
trades as quickly as possible. So in this above example we would not be able to trade
even though we can get a quick entry fill.So before we trade we know we can get in and out of our trades quickly. As I shall
explain further in the next chapter, we also only need the normal ebb and flow of
business in our market to get both fills. We do not need some huge buying or selling
to drive the market our way. This gives us another huge advantage over most traders
who need lots of events out of their control to make them profitable. We should only
need the normal flow of business to take place for us to be profitable if we analyse
liquidity properly (next chapter).
There are some differences between how we approach queue position depending if
the contract is thick or thin and I will explain that in more depth in the next chapter.
But one important point that I will make here is that the thicker the contract the more
important queue position is. For contracts with 1,000 plus on the order book, queue
position will be a huge factor in whether you have edge or not. It is one reason why I
don’t trade the short end of the US curve or even US 10 Year bonds – one of the main
ways to get edge in those contracts is through queue position hence finding edge is
harder.
There is a relative factor behind queue position which I will also explain the next
chapter.
Queue position is in fact, the first part of determining value (discussed later) in a
trade from a market maker’s perspective. The reason is that unlike price traders who,
say, want to buy 15s or sell 16s irrespective of the volume on those prices, even if we
want to buy 15s or sell 16s, we will only do so if the queue position works for us. We
will not join any 15bid or 16offer because those with too much volume on them will
not provide edge; in fact they take edge away from the trade. Only those bids/offers
that provide a queue position (on the entry AND exit) that could give is quick fills,
offer us edge.
So here is another major point of difference between us and price level traders.
Finally, on queue position, a word about what if the volume on the bid (offer) you
want to join is very low? For example, we want to be in the top 150 in a slower
market but there are just 10 lots on the bid. Here the answer will depend on how
many are on the bid (offer) behind. If the bid (offer) behind has say 500 on it then we
would join the 10 lots. I’m not worried about joining a small bid in this situation; I
back myself that I am acting earlier than some traders. I would rather join a 10 lot in
this situation than join a 1,000 lot which is probably the opposite of the comfort zone
for most retail traders (Tip: I am usually happy doing the opposite of most retail
traders!)If however, the price behind the 10 lots has, say 80 lots, then we should join the 80
lot price. Note that our effective queue position is 91 (10 on the bid/offer and 80
behind) so we are still within our 150 and so have a great chance of being filled but
would now get filled a tick better.

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