Ax

The ax is the market maker who is most central to the price action of a specific security across tradable exchanges. The ax can be identified by studying Level II quotes and noting which market maker seems to have the greatest effect on the security’s price.

Many day traders attempt to identify the ax in a given security and trade in the same direction as the market maker as a way to increase their odds of success. Often times, there are many market makers in a given stock and it takes time to determine which of them tends to control the price action. The ax may change over time if the traders behind the movements switch market makers to throw off those analyzing their moves.

Market makers can be identified using short codes that appear on Level II quotes. By using these codes, traders can determine what companies are behind what trades.

Some common market makers include:

• ARCA – Archipelago Trading Services Inc.
• BATS – Bats Trading Inc.
• NITE – Knight Capital Inc.
• CDEL – Citadel Securities Inc.

In general, traders should keep an eye on how many shares the market maker shows as available, how many they actually sell, the bid-ask spreads, and how quickly the market maker permits the stock to move in either direction. These dynamics can quickly paint a picture as to what market maker tends to actually have the most influence over a security.

Market makers have a lot of influence over securities prices, since they effectively control the flow of capital. And, the ax has the most control since it drives most of the price action in a given day. Most market makers simply post bids and offers, manage their inventory, and take advantage of low latency for arbitrage opportunities with electronic communication networks (ECNs) and dark pools, but some engage in manipulative behaviors.

For example, a hedge fund or market maker may place a huge limit buy order at a certain price level without intending to ever execute it, which could provide the illusion of support for the security. These actions could influence both the spot and futures market for that security. The same strategy can be used to create artificial selling pressure on a stock by placing a large limit sell order that’s slightly higher than the current price.

There are also cases of illegal market maker manipulation. For example, a market maker may front-run an investor by purchasing stock ahead of them after receiving an order. A legal, but still questionable, version of this strategy used by high frequency traders involves using algorithms to predict order flow by leveraging market maker’s execution algorithms. These practices increase prices for retail investors and increase profits for market makers and hedge funds.