Dear Bella,
Thanks for writing your book as I’ve found it immensely useful!

Regarding order flow, I’ve heard people saying that institutions and big traders place large buy orders hoping other traders bid in front of those orders. The institution will then sell those bids. In many ways it’s a game of cat-and-mouse that often goes unnoticed by new traders.

How true is the above and if so, how would you react/interpret it in your trading? Could it be possible
that they are doing it to pump the stock price up in order to sell higher later?

Bella Responds

First I would like to offer a joking response.  Do institutions enter fake bids and offers to induce buys and sales in their favor?  Of course they don’t.  That would be so classless at best and unethical at worst.  That would never happen on the Street.  This is a place for gentlemen/women who only act in the best interests of the nation, like teachers and those serving.  Also if you found value from One Good Trade, would it kill you to make a stop on Amazon and leave a review:  http://amzn.to/fvN3p8 ?

Now for the answer.  Sure that can happen.  Remember we make trading decisions based upon three factors: intraday fundamentals, Reading the Tape, and Technical Analysis.  So a big order such as you described would only in unusual circumstances trigger a trade for us.  So really your question is when these big orders are placed what information can we learn as it relates to Reading the Tape?

There are patterns that you will spot from the Level II.  If you see fake bids going in to trigger sales on the offer, then when you see a big fake bid you know what it means.   An Old School trade was to spot a huge order in the NYSE Book and place a trade in the direction of that order.  There are still trades to be made following the side of a very large offer, but they are much rarer.   Also, more specifically in the late 90s we all knew that GS to the bid prominently on the Tape meant he was selling.  So we got short.

Trading is just a game of pattern recognition.  Spot the patterns and place excellent risk/reward trades.  Good traders do not spend much time caring whether an institution or HFT is trying to game the system?  They just decode the pattern and find ways to profit.

Mike Bellafiore

Author, One Good Trade