The Gospel: Sweeps

Strategy by EBreidbart

The Gospel: Sweeps


This post explains one of the most important Wall St. Jesus terms for your trading edification: sweeps.

Trading is never a level playing field: technology and order types available to professionals are not always available to everyone else. Still, you might as well know what you’re up against. Let’s discuss what Jesus christened “sweeps”.

First, the technical explanation: An intermarket sweep order (ISO) is a digital circumvention of Rule 611 of Regulation NMS. For ordinary traders, Rule 611 is intended to force exchanges to allow a trade to be executed at the NBBO (National Best Bid-Offer) price, on whichever exchange it can be found. Disciples of Wall St. Jesus are bound by this rule. This can work against you: if you want to buy 100 calls of a stock at $1.10, you might only get 10 contracts at that price. To get the other 90, you’d need to file a separate order. This is slower and requires more work on your part.

Smart institutional players and market makers, however, have ISO’s, and can use them to sweep across the market, breaking a large order into as many pieces at as many prices as are needed to fill it.

Not all speeds are created equal.

But when would it be so absolutely vital for an entire order to be filled that a player would use an ISO?

There are, broadly speaking, two kinds of players you’ll encounter. We can lump them into smart (market makers, quant trading firms, high frequency traders) and dumb (individual customers, pension funds, asset managers, etc).

An ISO lets the smart participants outrun the fallout from a market-moving order by jumping off a sinking ship or by loading up on relevant assets. If an institution is causing a pile-on effect, or a massive customer is moving a smaller stock name, a smart participant can smell it coming. When speed is everything, an ISO fired across exchanges is like hitting the “easy” button: fast and effective.

But all is not lost! When you know a series of simultaneous orders is actually an ISO broken up across exchanges, you have insight into the undercurrent of the market and can leverage larger players’ positions to your advantage. Catching a sweep going off in the market as it happens can be the difference between a big win and total slaughter.

It takes a seasoned eye to pick apart separate orders and pieces of an ISO.

In the table below, we’ve highlighted a sweep of 520 June ’15 calls on DRI. The order was broken up across exchanges and filled in varying quantities at each, all simultaneous down to the millisecond. To the untrained eye, this could have been nothing. To the trained eye, this was massive.

Sometimes, sweeps can alert savvy traders to market-altering events in lockstep with breaking news. A great example could be seen with Twitter (TWTR) on July 14, 2015, when a hoax article reported that the company was working with bankers after receiving a buyout offer.

Aggressive sweeps into July, August and January calls led savvy traders to position themselves on the call side, and as the news broke (denoted by the red asterisk), the stock spiked $2 on a massive wave of call sweeps.

Once the article was debunked, a parallel wave of put sweeps dropped the stock back down. In real time, sweeps showed where the market was going—both up and down. The difference between the trader who could tell these were ISOs and the trader who couldn’t is profit and pain.

But knowing exactly what weapons smart players can use isn’t the end of the battle. The best traders look at the context of how they’re deployed, which Jesus calls steam.

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