Ax

What Is Ax?

Ax is the moniker given to the market maker who is most central to the price action of a specific security across tradable exchanges.

Understanding Ax

The ax can be identified by studying Level 2 quotes and noting which market maker seems to have the greatest effect on the security’s price. The term ax is sometimes applied to analysts who are especially influential in their calls on companies they cover, but this is a less defined usage of the term.

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, 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 the companies are behind specific trades. BATS, for example, refers to BATS Global Markets, which is owned by Cboe Global Markets.

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 which market maker tends to actually have the most influence over a security.

Market Maker Influence

Market makers have a lot of influence over security prices since they effectively control the flow of capital. 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. Some, however, do engage in manipulative behaviors.

A hedge fund or market maker, for example, 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. A market maker may front-run an investor, for instance, 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 the market maker’s execution algorithms. These practices increase prices for retail investors and increase profits for market makers and hedge funds.