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How to Beat the Market Makers at Their Own Game: Uncovering the Mysteries of Day Trading by Fausto Pugliese

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CHAPTER 9 Finding the Ax

As you can probably imagine, the major market makers don't make a market in every stock traded on the Nasdaq and NYSE. Even if they do make a market in a particular stock, they may not be the dominant market maker (called the ax) in that stock. For example, Merrill Lynch probably makes a market in more stocks than any other firm, and is the ax for some of these stocks. More often than not, some other firm acts as the ax in a particular stock, especially the stock of a smaller company. In that case, the dominant market maker may be a regional firm or a boutique firm that specializes in that segment of the market.

The dominant market makers are important to keep in mind when you're attempting to ride on the coattails of the big boys, because you must know whose tails you're supposed to be riding. You don't want to follow blindly behind a firm like Merrill Lynch or Goldman Sachs simply because they are mega market makers. Instead, you need to find the mega market makers within the particular stock you are looking to trade and then observe what they're doing.

To assist you in this process, I've listed some of the most common ECNs:

  • ARCA—Archipelago Trading Services, Inc.
  • BATS—Bats Trading, Inc.
  • EDGX—Direct Edge ECN LLC
  • NSDQ—Nasdaq Execution Services LLC

Whenever you come across one of these market participants, you know that they can't be the ax for our purposes. You should also ignore the order takers. As we discussed previously, some brokerage firms ...

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