Market Maker Signals – The Non-Nonsense Guide

There has been a lot of buzz around market maker signals and their impact on market price behavior recently. But what in the world does a market maker signal mean, where can you see it, and can those signals really improve your trading?

Where Do I See Market Maker Signals?

First and foremost, it’s important to know where to look to spot market maker signals. The theory says that you have to look at the number of traded shares in the times & sales list for cases where such orders were executed. In addition, Level 2 data with its incremental incoming orders in the order book are relevant by looking at the number of shares column.

All-in-all, reading market maker signals equals reading the tape, and the idea behind it is to interpret the behavior of the order book to your advantage.

Let’s continue this path and see where it leads us by following the idea of reading the order book for incoming orders and order sizes to identify hidden signals market makers send to each other to manipulate the market (well, not really hidden when we can see the order book).

Okay, so the theory goes this way: Market makers communicate to jointly drive the market in one or the other direction by using specific order sizes that you can see in the column “Size/number of shares,” where the message behind each number differs.

Market Maker Signals List

Market Maker Trading SignalDescription
100Please, I need shares
200I need shares but don’t let prices go lower just to fill my orders
300I really need the shares now, so let’s bring the market down to fill my limit orders
400Let’s keep moving sideways
500Let’s gap the stock now
600Prevent prices from further increasing by loading up the ask side of the order book and establishing resistance
700Go go go, move the price higher
800Be ready for higher trading volume
900Let the stock do what it wants
911Press releases pending
1000Prevent the market from further increasing

The Role of the SEC

It is nothing new that market makers influence the stock price with orders. But the times are long gone when market makers dominate the order activities. Today, high-frequency trading systems dominate the market, and they don’t need a market maker. Everything happens in milliseconds.

The SEC always monitors market maker activities and has certain legal restrictions in place. So from an SEC standpoint, there can’t be something like a legit market maker signals list to communicate to each other with the intention of manipulating the market.

Common Sense

Can there really be an advantage of reading the order book’s incoming order sizes or the times & sales to clearly get a signal if the analyzed stock is going higher or lower short term? Let’s think about it by taking different perspectives.

Who Says That the Numbers and Their Meanings Are Correct?

The most important thing before analyzing the impact of a specific market maker signals on the stock price is that you know that you interpret the signal correctly. Therefore, it needs proof that those numbers are correct and real-existing.

But wouldn’t it be absolutely contradictory if the market makers were not allowed to agree with each other due to legal restrictions? On the other hand, there would be documentation about which codes they use to give each other signals. I think the main problem already starts here.

Maybe the real signals are 333, 521 and 858. Who knows without documentation? Let’s say you do it all behind the curtain and know that the codes were uncovered. Wouldn’t you change the code numbers and meanings to keep retail traders out and hide your activities?

How Practical Is It to Analyze the Market Maker Signals Feed?

With coding and programming skills, you can’t identify all those potential market maker signals just within the blink of your eye. It would be hard enough to monitor one stock but entirely impossible to monitor 3, 5 or even 10 stocks same time manually.

So, you need a separate trading software or someone who combines the received market data via an API interface to a program that measures the signals. Now, let’s say you get about 2,000 signals per day. All are mixed, some with the code 100, others with 300, and others with 700.

All that happens within fractions of a second. Were is your benefit?

Did Someone Analyze Those Market Maker Signals in Detail?

There is some detailed discussion on Reddit about the market maker signals and their impact done by r/Superstonk. He published many detailed analyses, screenshots and counts of all those signals. So, cudos to him for all this work and analysis efforts, which increased transparency in the matter.

He pulls the data from Webull’s level 2 data feed. The first question when I read Webull data feed is whether the Webull Level 2 data feed is unfiltered or pre-filtered by the broker.

Let’s say all the data is correct and based on reliable market data to conclude the right things.

As of now, he concludes that the date is only sometimes helpful since there is frequently no correlation, which makes market maker signals challenging to use for proper price projections.

Would a Market Maker Risk His License by Doing Such Questionable Things?

Having a market maker license equals printing money for the market maker. He is the house, and the house always wins. What benefit would a market maker have if he complicatedly communicates with other market makers via order sizes? Would it be worth it to risk the license by doing such things? Since the SEC can read the order book and times & sales like we all can, he could even go directly to the SEC and say.. hey, I manipulate the market with others… You will agree this won’t make sense.

What Do You Do With That Information?

What do you do with the information that a market maker needs more shares? He always does!

Also, what if a retail trader places an order for 500 shares, and you see this in the order book? Would you conclude that the market will gap up or down just because you see this share size? Better not!

So, what do you do with the market maker signal information? Do you see any practical way to implement it in your trading routine?

Market Maker Signals Conclusion

That market maker signals influence the price structure of an underlying asset is and remains a theory. Chances are that this worked 20 years ago when people had to place their orders by phone and when market makers dominated trading volume.

Sure, it would be great if you only had to monitor the codes and automatically know if the stock price is going higher, sideways or lower. But with thousands of signals per stock per day, there is simply no clear benefit. Also, today, things are different, and HFT algorithms dominate the markets.

It appears to be more beneficial to use backtesting software to test trading strategies or automated trading systems for a more convenient way of order execution. But following shares sizes in the order book or times & sales does not seem to be a good idea. There is no published case study about specific results, backtest insights etc., and everything is still on a maybe level. So, you should move on and leave the market maker signals theory behind you until it is proven that it works.

The theory behind market maker signals is one of the examples of why you should not mindlessly trust everything you read on the internet, and even more importantly, you should not place an order just because someone bought 100 shares or placed an order of 300, etc.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.