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"Liquidity Grab": Trading Special Events

In our Traderade Discord today, I used the term "Liquidity Grab" to describe a unique market phenomenon that I look for when trading special events, such as FOMC or significant earnings (like Apple and Amazon this evening). I thought I'd spend a few minutes elaborating on this term and how I like to trade a Liquidity Grab.


Before I begin, I need to make something absolutely clear: The following information ONLY applies to special market events where the normal algorithmic liquidity surrounding the Bid/Ask spread disappears. It does NOT apply for regular, everyday trading.

 

Allow me to set the stage...


During Regular Trading Hours (RTH, 9:30AM-4:00PM EST), there's typically a thick cloud of resting limit orders near the Bid/Ask spread. For the S&P500 Futures (ES) these orders usually rest anywhere from +/- 2 to 10pts from current price. This is normal and largely fueled by Maker/Taker high-frequency algorithmic trading (HFT) strategies that benefit from supplying liquidity on both sides of price to the market. In addition to the HFT strategies, there's also resting limit orders from both retail and institutions alike, waiting for their fills. But during a special market event where high volatility is very likely, the resting limit order book will thin out dramatically, as neither discretionary nor HFT traders know which way the market is about to break. Typically, we see the order book thin anywhere from a few minutes to a few seconds before the big announcement or news is scheduled to be released. As a self-proclaimed "trading nerd," this is my absolute favorite thing to observe. After all these years, I still get chills when I see the order book empty out and price flutter nervously, waiting for what is likely to be a large move. It's a thing of beauty to watch...but it's also a time for opportunistic trading if 1) you're fast and 2) you know what you're looking for. My goal with this short article is to show you what I look for and how I typically trade it.


Before I go any further, I should emphasize that point #1 above is pretty important here: If you're not a scalper or if you don't have quick reflexes, this strategy is not for you. I'm not trying to be rude, I'm just stating the facts: In order to take advantage of "Liquidity Grabs" you need to be fast, dexterous, and have the ability to synthesize new information quickly.

So...what's a "Liquidity Grab"?


After the resting liquidity disappears in anticipation of the news, participants (algos & humans alike) are looking for whatever clues they can get as quickly as possible. The most obvious clues are often new large resting limit orders; however, how price responds depends on where the new orders show up.


  • If a new large order hits the book far from price, then price is likely to run towards it as larger players scramble for liquidity to execute their orders.

  • If a new large order hits the book very close to price, it's common to see price run away from the order, likely interpreting the aggressiveness of the large order as a "bad sign" or someone needing to get in/out quickly.


Let's take a look at an example of the first scenario where price rushes towards fresh liquidity entering the market during an event when there's virtually no other liquidity resting on the book:

The screenshot above is from today (2/2/23) just after the market closed and as traders were waiting for Apple and Amazon earnings (amongst other notable companies). I'm using a screenshot from Bookmap Pro with my own annotations to add some visualization to the aforementioned event-driven scenario.

  1. We can clearly see the normal liquidity vanish at the Closing Bell. The cloud of orange, red, and yellow represent existing orders in the form of a heatmap, with red being levels with the most orders stacked. Note how the background essentially turns black, indicating liquidity is gone.

  2. While waiting for the earnings announcements, price flounders for a couple minutes as it's essentially directionally clueless during this period of time*.

  3. Then we see the first large order hit the book at 4200, roughly 12pts from where price was currently trading.

In an instant, price rushes violently towards the liquidity, filling the interested seller and even ripping through to fill a couple orders leftover from RTH.


That, my friends, is a "Liquidity Grab."


If you're quick, it's one of the best scalping setups in the world. (Note: For people in the Discord today, my decision to short the market after that order was filled was entirely discretionary and not the focus of this article.)


Before you start thinking "Ok that seems super easy," allow me to explain a very important distinction: Where the new orders hit the book in relation to current price matters a lot.


Here we have 2 different scenarios for event-driven scalping: One where the first large order to appear is not close to current price (on the left) and one where the first large order to hit is essentially smothering price, or very close to it (example on the right).


Since we've already discussed the scenario on the left, let's dig into the one on on the right.


If the first large order to hit the book is smothering price, it's very common to see price run away from the order rather than fill it. If you're quick, this is also tradable information. I cannot say with 100% certainty why this happens, but if I were to speculate I would imagine it could be likened to a "tell" in poker, and the market senses the urgency being projected by a large participant that wants to be filled NOW. This naturally begs the question, "Why?" Why so much urgency? What do you know that we don't? Rather than take the time to figure it out, it's common to see price rush away from that very antsy trader. In fact, it's also common to see this cycle repeated, meaning a buyer or seller starts to chase price urgently, which can exacerbate the move.


In summary, where the order hits is important:


I consider these 2 scenarios "Rules of Thumb," meaning it's what you're most likely to see; however, anything is possible in trading and it doesn't always pan out perfectly. Regardless, it's always a good idea to trade with the odds or probabilities in your favor. It's also worth noting that both of the scenarios described above can be inversed. If the first large order shows up far away from price to the downside, then the most likely outcome is to rush to that order below. Similarly, if we inverse the scenario above on the right, it's common to see price run away from very aggressive buyers showing up right under current price.

 

Can you build a career with these rules of thumb for Liquidity Grabs? No, probably not as they are not that common and they only apply to trading special events. But I do hope this article helps you gain a better understanding of some specific market dynamics I've seen play out time and time again. One final note: If you found this information useful but it's not a strategy you currently utilize I would encourage you to 1) WATCH and attentively observe during the next big market events before attempting to use these strategies and 2) ALWAYS trade events with small size. Sometimes price will ping-pong violently as new large orders appear and disappear during an event...no scalp trade is worth taking a significant financial loss.


Whether you ever use this information in your trading or not, I hope you found it interesting and inciteful...the day we stop learning about new market dynamics is the day our edge begins to grow dull.

Stay sharp,


Horse


 

*Side Note: One of the reasons I find this phenomenon so beautiful is because it represents a few moments of raw "price discovery" which is rare these days. Traders used to think and act in terms of weeks/months/days, but with the advent of High Frequency Trading, timelines have been compressed dramatically and seconds have become the new "weeks/months/days" in trading terms. Don't believe me? Research historical changes to the average holding times of a position. During these few moments without HFT, true price discovery happens and it's beautiful to watch.

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