Prior to trading for myself, I had a career as both a broker and a trader for a brokerage firm. As I look back on that experience, I am thankful for many of the things I learned about people and the markets. One of the most important things I learned was about order flow and routing.
For those of you who are not familiar with how the order process at a traditional brokerage works, your order is not directly routed to the markets for process. When your broker contacts you or vice versa, your order is taken and handed over to the trader at the brokerage either electronically or via paper as it was when I was in the business. The trader will then send the order electronically to a market maker for fulfillment.
Market makers are brokerage firms that have agreed to provide liquidity in the markets. They stand by, willing to purchase or sell stock so that investors and traders can find liquidity in the markets. They also fill orders for their own customers. As market makers are businesses themselves, they are interested in making profits.
When I received an order from a customer, I would look to see which market maker was offering a good price. Mind you, this price was wholesale and not what the customer would normally be filled at. The customer was guaranteed to get the best retail price at the moment of process, not the moment of order entry. This included limit orders. If the market maker or brokerage trader could buy at a lower wholesale price, they would and then turn over the stock to the customer at the limit price while pocketing the difference.
You may have moved on from calling a broker, but unless you use a direct access brokerage for your trading or investing, you are simply sending an email to the trading desk when you trade electronically. A direct access brokerage bypasses the middlemen and allows you to access the exchanges directly for the best pricing available. Essentially, you can get the wholesale pricing for yourself.
The reason why I bring up this process is that it not only explains why you may not be getting the best fills on your orders but it also starts to explain the order flow process and why supply and demand works. When a market maker starts to have orders stack up near certain prices, they want to fill those orders as quickly as possible so they can profit.
Just imagine that there is a large stack of buy orders at $14.00. When the price of the stock moves down to that area, the market makers are busy filling their customers’ orders. But if there is a lack of supply to fill all of their demand, then not all of the orders will be filled. Price will move upward sharply due to high demand and low supply. However there is still a large number of unfilled buy orders at the $14.00 level. These leftovers will offer the educated trader the opportunity to buy with or just in front of them should price return to that level.
I am only referring to the retail customer orders in this example. When we layer institutional order flow on top of this, we can predict most of the market movement and profit from it. That is why we teach traders in our Professional Trader course how to identify these leftover order areas to get high probability, low risk, and high profit trades. We even teach many odds enhancers so that our graduates are able to identify the best trading opportunities.
So if you are not aware of how to identify these areas of leftover orders, go visit your local Online Trading Academy educational center and sign up for a course today. You want to eat the leftovers, not let them spoil your trading!