Nasdaq stocks used to be quoted with large trading increments. This meant if Goldman Sachs stepped in with an offer for INTC at 45 1/2, you could not lean on him or front-run him at 45 3/8 as a market maker.So if INTC had been bubbling up a couple times, it might almost get to the point where you could trend trade it at a 1/2 spread. But then if Goldman Sachs stepped in, or stuck with an offer at 45 1/2, that meant he had basically chopped off the trend.By calling him the "axe" I took it to mean he had the ability to chop off any trend or run, because he was known to represent size. Goldman Sachs could reveal information by exposing himself as the axe back in those days, because you could not front-run him at those huge increments. The best you could do is offer along side him, which everyone would.So all the market-makers with no business to do would run one way or the other on any order flow, until Goldman stepped in, and then the market would sit there for a protracted period of time.It is useful to understand that all market makers were required to post a bid and offer with, say, a 2-point spread at all times. So their bids and offers being present at a particular level did not indicate any type of support or resistance in the form of real interest.Understand that in the absence of an ability to trend trade, there is tons of trendiness. So if at 10:30:00 there were 10 market makers at the offer, and at 10:30:10 there were 4 market-makers at the offer, it was reasonable to predict that at 10:30:20 there would be no market-makers at the offer, so it would become the bid.So any rotation at the bid and offer was very easy to extrapolate into a 1/2-point move. Two market-makers would leave, one would come in, the offer would steadily erode. Not so with Goldman, because Goldman is the axe. So if the offer is steadily slipping away, but the axe drops in, it outweighs the other action.Large trading increments seem to be a prerequisite to there being an axe. Otherwise he would have to hide and could not allow himself to be observed. Either that or perhaps some kind of sweeping opportunity, so that by the time you see him it is too late.In this case he can expose himself up to the point where you would be able to front-run him. The safest you can assume is that the market will now go sideways, whereas it was going down before he started buying. So I guess there can still be an axe, who heralds the beginning of two-way action, and the stabilization of prices, after a trend or air pocket.
Last edited by farmer
on January 3rd, 2011, 11:00 pm, edited 1 time in total.