What's up everyone? All right? Well, today, just before I was about to sign off and was finished trading for the day, we had pretty epic Algo Flush and I thought this is a good opportunity to do an episode on how the Algo Flush works. So whether you're a beginner trader or an experienced trader, these Algo flushes where a stock drops like, you know, 10 in one second. It's baffling. How does this happen? How's the stock with this one's got 34 million shares of volume? How does it go from you know, trading it in this case, eight dollars and 25 cents to just dropping to 740 and halting going down in two seconds.

How does that? How does that happen? And so to understand this, you have to understand market structure a little bit. and you have to understand the mechanics of how our orders are sent to the market. The market, of course, is Uh, is an island where it's processing all the incoming orders from traders all around the world. We also have to understand the role of market makers and high frequency trading algorithms.

Now, I already did an episode and this is a longer episode. It's like an hour long that was specifically getting into the detail of market structure, high frequency trading algorithms, dark pools, and things like that. So if you haven't already checked out that video, I encourage you to do that. I'll put a link at the end of this video so you can watch that.

You can watch this video and I think you'll learn quite a bit about this Algo Flush. And then if you want to keep learning more about how these market makers work and some of the tricks they play, then you can check out that episode next. So that'll be at the end. It'll be the next video to watch.

So what ends up kind of happening here is this is a big part of the Algo Flush is these high frequency trading algorithms and the market makers. So first, you sort of have to understand the role of the market maker in the market. So when I am wanting to sell a stock, you know let's say I'm holding 10 000 shares of a stock. The second I press that sell button, I get filled.

Right now. It may not be the case that there was another trader out there in the world that wanted to buy that same exact stock at the price that I sold at. And so who's the intermediary? It's a market maker and so the market maker stands at the ready to buy shares from people who are selling and to sell shares to people who are buying And they profit from the spread between the stock. Now, they also carry risk by holding by sort of.

It's kind of like a um, uh, arbitrage because they're holding for a very short period of time thinking that, okay, I'll buy these shares from this guy Ross, but then I'm going to turn around and resell them a minute later to someone else who wants them. Or five minutes later or whatever it is. so they're just holding for very short periods of time. But what if all of a sudden someone starts selling a hundred thousand shares? Two Hundred thousand, Three Hundred thousand? A million shares.

A market maker can't just buy an infinite number of shares. If they do that, they become massively imbalanced in the risk that they have when they're providing the market for hundreds, thousands of different stocks. You know they have these risk models that they have to be that they're using to make sure their portfolio doesn't become imbalanced. And so they're adjusting their bids and their offers in real time based on what's happening in the market.

Of course, they've trained. in the old days it was actual market makers and specialists that were sitting at their computers or sitting on the exchange, making the market. Well, that's not the case anymore Now that's automated to these high frequency trading algorithms that essentially are doing the job. Uh, instead of having a real person doing it in most cases.

So what ends up happening here is, and this was the case with this stock, which we'll show you when we sort of get into the the nitty gritty. What happened was someone put out a really big cell order. Okay, so that sell order was received and it was processed. And now because all these market makers subscribe to these incredibly data rich feeds from the exchanges, they see these big sell orders coming through.

and now they're going to start pulling their offers right because they don't want to oversell the stock right. Or in this case, they're buying so they don't want to overbuy the stock. What if What if the stock is you know the company's filed for bankruptcy? What if something really bad has happened? So part of their risk model is making sure that they don't over buy or oversell, they have to maintain a balance on the position. Ultimately, the best market maker is going to be able to buy and sell the same number of shares in one day.

Let's say it's a million shares and they profit from the spread. So you know, 10 000 shares a penny is 100 bucks. A hundred thousand shares of pennies. A thousand bucks.

A million shares. A penny is. uh, what is ten thousand dollars, right? It just keeps going up. So you know this.

This is where that's their goal. But that means the Algo that they've employed needs to respond when there's sudden surges in demand or in supply. And so in this case, all of a sudden this big sell order comes in and so it gets filled, probably with some slippage and then the person sends another order that was even bigger. and now the market makers have already started to pull their offers.

So pulling start pulling the bids and then that order gets filled even lower. and now what starts to happen is this runaway cycle. Now you've got panic selling Now you've got some stop orders they're firing. You've got some traders who are like whoa, did this thing just drop 40 cents and then that sort of triggers this immediate panic cell that goes right into the hull.

And now in this case because there was no actual news associated with it, it was just this Algo flush. It's ended up rallying back up to pretty much where it was before the flush. So we're going to get into it in a bit more detail. I'm going to show you the chart and if you're interested in market structure and you want to learn a little bit more about how market makers work how these high frequency trading algorithms work, then make sure you check out the episode at the end of this video.

I think you'll get a lot out of it. Alright, so I hope you enjoy and I'll see you for the next episode. All right. So let's jump in and look at this.

I'll go flush. So Pev this is a stock that is up 33. It's actually not up a whole lot, but um, it had a nice move yesterday and was very volatile yesterday and it actually had a couple of these moves yesterday, but we just had one that I want to kind of highlight. So the Algo Flush.

It's when basically the stock is trading and all of a sudden it feels like the bid disappears and you get this flush. and all of a sudden all these stop borders are firing and then they're hitting the bid and it sort of is this, um, it's It's like self-fulfilling accelerating sell-off and then into a circuit breaker halt. If there weren't circuit breaker halts, this could keep accelerating. but the circuit breaker halt stops it when it drops more than 10 within a period of five minutes.

So Pv, you know, was started trading fine today. I mean, a little choppy in a couple spots. There's a red candle here. Red candle here, but generally was pretty good.

It squeezes up to about 8.50 is pulling back, consolidating. Nothing really on the one minute. Super alarming. I mean, yes, it did have a false breakout right here.

Well, kind of just a double top. You know, it tried to break this level, couldn't break it. So you've got a double top. sort of higher red volume, you know.

But again, nothing. Nothing super super crazy. And then all of a sudden it drops right here. in a one minute candle from 8 28 to 7 40..

Boom halts down. That's a one minute candle. So now let's zoom in on that one minute candle. on this time frame.

Right Here we can look at a 10 second chart. So on a 10 second chart. Basically, it's like this thing just instantly dropped right there. Let's zoom it in one more time.

Five second chart. So on a five second chart. Wow, That basically was like one candle. Let's look at this on a one second chart.

on a one second chart. What you're going to see is that basically this thing just instantly dropped to eight first and then it went all the way to 747.. it held there for a second and then it dropped lower. So how does something like that happen? You know this stock was trading at 8.25 I mean what's the deal? and over on.

Um, of course when you're watching a stock trade you you could see the the orders going through. You can see the prints going through and one of the things that some traders will do is they'll and you can do this on think or swim very easily. You can filter the level two to show or filter the time and sales to just show you orders over a certain share size. And so I'm going to show you this here and this is small but we'll make it a little bit bigger so this shows you.

Oops, Sorry, um where do we go There we go. sorry, this shows you. We'll zoom it back in. This is right in this candle and so what you see here and I'll just move this out of the way because it's distracting is, um, you know there's a there's a buy order of seven thousand shares.

whatever. And then all of a sudden there's a thirty thousand share sell order. At Eight Dolla. it fills at Eight Ten.

So think about that for a second. the order fills at 8 10. Which most likely means that someone pressed the sell button for 30 141 shares when it was trading at around 8.25 And what do we know about the way market makers and Ecn's how their high frequency trading algorithms. The way the algorithms match orders.

What do they do when they see those big orders come in? Now, if you've watched the video on the truth about high frequency trading algorithms and market makers, you already know all the details of this. But to summarize, what happens is that order is received, it starts to fill. and then all of a sudden you're going to see the bids start to get pulled. And I mean you would have to slow this down to like the nanosecond.

It happens so fast the bids start to get pulled, order receives slippage, Then a second order is executed for 38 925 shares at 801. A second big block order. And it's those big block orders like that that all of a sudden now the market maker's moving out of the way again. and now as it's moving out flush and that becomes that accelerating self-fulfilling prophecy.

So this is all around how I mean this is. this is. I mean, this gets into the topic of how computers ultimately are kind of governing the price of stocks. yes, individual traders.

We're adding liquidity to the market. We're coming in, We're pressing the buy button, we're pressing the sell button. and then there's everything behind the scenes that's matching those orders. So all of that order matching.

And when you and what you know is that market makers provide liquidity. They sit on both the bid and the offer. So when you have someone that comes in and hits the bid with a really big order, the market maker algo doesn't know. You know it cannot just absorb a million shares If someone just tries to sell a million shares on the bid, right.

They can't just buy an infinite number of shares. So they are responding by moving their bids and moving their offers based on current market based on the way their Algo works. And so when you have this moment where all of a sudden there's a influx of selling, you get the Algo flush. and so we call it this Algo flush.

I mean these are actual real orders that are going through, but it's um, it's it's sort of fueled by the way the Algo responds to these orders where you get this rug pull effect and then you have stop orders that are firing right. Stop orders. Fire. They hit at market price as market orders and then that fuels it even more.

And the reason we need these circuit breaker halts is to prevent flash crashes because otherwise we would see just the the snowballing accelerate. So on a stock like this it instantly drops. you know, 10 percent and then that kind of stops the algo. It stops everything.

Now the stocks halted for five minutes. All right. So during that time traders get a chance to kind of catch their bearings and then that's when some traders say well wait a second that was overdone and they come in. they buy the dip and then you get that.

You know, sometimes you get the rally back up. Now if it had actual news that something terrible, you know I don't know an offering or something was happening then it would probably continue lower. And we would say that it was most likely an Algo that received a high frequency trading algorithm that received the breaking news first and that was what created and began the sell-off But in this case it may have very likely been a couple of really big orders. Now you know these are these are for 30, 40, 000 shareholders.

These are big orders that are going through and then you know a couple more go through here. It's not. It's not clear that those are necessarily related to the same order, but um, those might just be other other traders that hit the bid so you know I don't want to. I'm not going to go into all the details of high frequency trading algorithms and market makers.

If you guys are really interested in that, you want to learn more about that, you want to learn more about dark pool routing. then you know. Check out the other video I did on it. I think you'll really enjoy it.

So um, I'll I'll put the link up here in the top corner. Check out that video. The Truth on market makers and high frequency trading algorithms. This is a good example.

You got the Algo flush and you can also get algo spikes. It goes both ways. So learning how to sort of read the algo and understand how it works I think is very helpful if you know you're trying to trade actively in these markets. All right, So that's it for me.

Check out that video and I'll see you guys first thing tomorrow morning.