Two-way Flow

As stated earlier, market makes are students of liquidity and base many of our
decisions around liquidity. Another vital aspect of this relates to two-way flow in
Two- way flow means there are sellers hitting the bid and buyers lifting offers at that
moment. For market making style scalpers it is essential that we see this type of
activity when we trade.
The opposite of two-way flow is one way trading. For example, if a market is rallying
and buyers just keep lifting the offer with few or no sellers hitting bids.
It should be evident that in times of one way action we cannot get in and out of a
trade quickly. Therefore we should avoid these times. If, for example, a 15b/16o
market is trading 16,16,16,16,16,16,16 – while we can see that value is 16, without
any 15 prints we cannot get filled on a 15 bid. You may try a 15 bid for a very short
time but if 16s only keep trading you must pull the order. In these types of one way
markets there are two main possible outcomes. First, we don’t get filled at all.
Second, if/when we do get filled we probably won’t want it. In these types of
conditions when a seller finally arrives it is probably a large seller and many of us
will get hit together and be scrambling to get out.
So we must learn to recognize whether our market is trading two-way or one-way.
Typically, markets where the underlying contract is open, tend to have two-way
business but this will not always be the case. However, if you are trading an out-of-
hours time and even sometimes in bond markets, business can get too one-way at
times so watch out for this.
If we think about it, when there is two-way flow we should be wanting to trade
because our main tool, the spread, works well in that time. In a 15b/16o market that
prints – 15,16,15,16,15,16,15,16 – either buying 15s or selling 16s should be
profitable just by using the spread (as long as we can get good queue positions). If we
join the 15bid and get filled we should be able to flip 16s and vice versa.
So when there is two-way flow, experienced market makes usually want to get
involved. Trading in this way will lead to more trades (can be over-traded too) and is
perhaps a more aggressive style so to begin with you probably want to stick with all
of the value tools for your trades. Over time though you can think about introducing
more of these trades.As discussed previously, pace of market is also linked to two-way flow. The more
trades your market achieves the more there are for us to trade in and out of. If the
pace of trades drops, it may be harder to get in and out of trades quickly. So get to
know what a good pace (number of traders) is for your market.

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