I trade on Kraken, and I have noticed that the order book is increasingly controlled, it seems, by the trading bots. I imagine that is the case on most exchanges. There are a myriad of very small orders relatively close to the strike price, but the first significant order (to buy or sell) is usually a fair distance away. Then, after you execute a market order, before you have time to refresh the screen the small orders you just took out are replaced with new mini orders.
Therefore, I know that if I place a market order the bots will make me pay more dearly than real live humans would. But if I place a limit order, particularly if it’s a relatively large limit order, the bots will fill the book with small orders in front of mine within seconds. It’s called front-running when the exchanges themselves do this. If it’s not illegal for exchanges to do this, it should be. But for other traders, I guess these are the rules of a knife fight.
How to defeat these bots?
My strategy is to take a half-taker half-maker approach when I want to fill an order quickly. In other words, suppose I want to fill an order quickly, buy or sell doesn’t matter, but I don’t want to give too much to the bots. If I want to buy 100 coins, for example, I will find the limit price that will buy me 40-50 coins. I enter the limit order at that price. What usually happens (not always, particularly not if a fast market) is the entire order is filled at my limit price within moments, as the bots kick in.
I share this info because I know the bots are eating you alive too. Maybe together we can take away some of the bots’ unearned profits.