Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
READING THE TAPE
I've just finished reading some of your articles in STOCKS & COMMODITIES. Once again you illuminate topics that were unknown to me. I'm a novice trader in a proprietary program down on Wall Street, and I have been running into difficulty with this market (just as many others have). I have been trying different methods to see what might work for me. Recently, I have been employing a method that watches for size stepping up/down in stocks with volume on average between 80,000 and one million. I like this technique because I can clearly define my edge and believe it to have a positive expectancy. The trading has been rough, though, and I'm just accumulating small losses (being stopped out a lot). I haven't had any sizable wins as of yet. Are you familiar with such an approach? The method involves reading the tape closely. Would you explain what trade-throughs and matching trades are? - John P.
Thanks for reading the magazine. If I read you correctly, you are scanning based on volume movement in a certain universe of stocks and/or looking for large-size "block prints" on the tape. This is an old standard that (to be quite honest) doesn't have a great track record. Simple volume swings have less meaning than they did in the past, due to the trading of derivatives (mainly options). Since many floor traders are doing conversions and reverse conversions on the underlying stocks, the volume numbers have been skewed considerably over the years.
We suggest to our newer traders that they focus exclusively on only a couple of stocks. This way, they become "surrogate specialists" and learn how the stocks trade. It is so much easier to trade the same stock 20 times a day than it is to scan for a stock you know nothing about and expect to do well. Think about it: When you scan for stocks, you will be trading against many individuals who trade the stock day in and day out. It's better to play poker with people you can read than to join a game with experts you know nothing about.
The standard definition of trade-through is a trade that takes place at a lower price than your bid or a higher price than your offer. These are not allowed on the NYSE or other exchanges. You may see trade-throughs take place on some over-the-counter (OTC) stocks, since there is no central marketplace.
Matching trades are simply trades that you see on the (dedicated) ticker for your stock when it seems that duplicate trades go by. What is generally taking place is that there is a broker in the crowd who is a "go-along" buyer or seller. This means that he/she will not push the stock in one direction or another, but will simply match any trades that take place. This way, the broker is accommodating his customer without showing his/her bid or offer to the public.
SPECIALIST TACTICS
I often hear traders mentioning the tactics of specialists. I am not a daytrader. However, I would like to know of a basic source for obtaining broad knowledge of these tactics. I realize that specialist tactics can vary from stock to stock (some are better traders than others, and so on). - Victor S.
If you visit the New York Stock Exchange (NYSE), you will be able to get a glimpse into their world. That will help allay any fears that they are "trying to cheat you out of 1,000 shares." Then get an NYSE rulebook. We make sure our people understand the primary rules before they begin to trade (time priority, size priority, trade-throughs, matching, and all the rest). You are wise to ask for this information - it will save you a lot of concern about your fills, or lack thereof.
FOLLOWUP TO SPECIALIST TACTICS
Where can I get the NYSE rulebook? The only rules I can find at their website apply to arbitration. Is this an actual book, or a .pdf I can download? - Victor S.
You can call the exchange. I assume the rules are available to the public, not just broker-dealers. The book is Constitution And Rules, published by Commerce Clearing House (CCH). Topics include the constitution, general rules, dealings and settlements, admission of members, operation of member organizations, communications with the public, disciplinary rules, listing and delisting securities, arbitration, option rules, exchange portfolio rules, off-hours trading rules, and an index. Most will be interested in the subsection "handling of orders and reports."
CONTRACTS
Is it true if one Nasdaq 100 index futures contract moves 40 points, that move would be $4,000? Since the Nasdaq futures contract is 100 x index, is every point worth $100? If so, how about the e-mini Nasdaq? It's 20 x index, so is that $20 for every point move in the contract? Finally, in S&C's "Futures Liquidity," what is effective percent margin? - GSeremitar
Yes, one contract equals $100 and $20, respectively, for a single-point movement. And the "effective margin" refers to the amount of money required to buy, sell, or hold these contracts.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US. E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the December 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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