How I Trade (part 1): 1 Minute Chris Farrell Interview

8th Feb '10 by Tim Bourquin

3 comments 4679 reads

Stock traders know that getting a feel for how market makers and specialist move shares is critical to seeing the ebb and flow of the market. Chris Farrell is a former market-maker turned at-home trader and has a huge advantage in that he knows exactly how the market makers play the game. In our interview, he talks about how you can use his knowledge to make better trades.

Tim Bourquin: Chris, can you explain your overall philosophy of trading?

Chris Farrell: I always look the market in terms of, it is not fundamental and it's not necessarily technicals that move the market. It’s supply and demand imbalances and typically what happens, oftentimes in the media, on a day when the market is up, they often say that there are more buyers than sellers and that's what's driving the market up. Well, that is not necessarily true. For stock to trade, there has to be an equal amount of buyers and an equal amount of sellers or the stock cannot simply trade. So, I view the market basically as a collection of buyers and sellers trying to transact and the market will adjust higher when sellers are able to get a higher price for their stock and it will adjust lower when buyers are able to get a better price for their stock. So, it is a constant process of negotiation that's going on in every single stock, every second of the day as long as the market is open.

So, within that framework, what I like to look for are temporary gaps between where the buyers are willing to buy and the sellers are willing to sell. In other words, a wide gap between where the buyers are trying to buy which is the bid and the sellers are trying to sell which is the ask. Now, as the markets have become more electronic and as we've moved from a market that traded in fractions to a market that traded in decimals. A lot of these gaps between the buyers and the sellers have appeared to narrow. You have to use more tools to view the situation. Now, luckily, there's technology that is at the disposal of any active trader, which allows you to see the depths of the market and that gives you a more true indication of the supply and demand…

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AnonymousUser858

8th Feb '10

I don't want to be a pedant, but I find this very difficult to read and understand.

It reads like a transcribed conversation that has not been edited. It includes non-sequiturs, repetitions and incomplete phrases/sentences. In live speech these things are naturally moderated by voice tone, phrasing and body language. All of those moderators are absent in a transcript like this and as a result it is very difficult to understand. eg

There's a concept called, and this is a relatively simple trading concept but, it is one of the most important things that a trader can learn especially trading in the New York Stock Exchange list of stocks. There's a concept known as “clearing the order book” and what that means is that if you see a large seller in the market, if you are going to buy from that seller, you have to be sure that whatever price that that transacts at, that that clears the order book. In other words, that price is at a point where that seller's entire order trades.

I would suggest that the writer/poster spend a few minutes editing future transcripts to clean them up and make them more intelligible.

marben100

Sorry, but IMO the article is utter garbage & misleading.

A lot of this is based on just reading where the buyers are and where the sellers are and determining from that where the stock will open and then whether that large buyer or seller gets filled and is then out of the way. This is exactly how the specialist on the floor had traded for decades.

The difference between the amateur trader (aka "mug") and the true specialist/professional, is that the professional has a good knowledge of who the buyers or sellers are: he is often acting on their behalf.

Without that knowledge, you're just guessing & gambling. It is impossible to be sure from the order book what the "clearing price" is. You don't know what hidden buy or sell orders there may be. The order book can give clue but it can also mislead. This is especially true in these days of algorithmic trading, when programs have been developed specifically to manipulate the order book to the advantage of the trader behind the software.

Mark

loglorry

9th Feb '10

Yes I agree Mark utter garbage. It might have worked at some point but these days algorthims are used to break up large orders into small chunks and prices are moved around slightly to try to get a deal done at the best possible average price.

The writer assumes that there is such a thing as a "large seller" who just dumps a big block of stock and doesn't care what price they get as long as it is within a ballpark of the current bid. I just don't belive this is who things are done anymore. Brokers will work an order in ways that hide this. Furthermore, often a trade can be made outside of an exchange if it is a large trade and only reported later. Again this goes against the idea that large insto buyers and sellers just dump stock or go buying at any price - many deals are done off exchange.

How I Trade (part 1): 1 minute Chris Farrell interview

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Tim Bourquin

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