Since You Asked
| Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
ENTERING ORDERS
If one wishes to enter orders (buying or selling) market-on-open and/or market-on-close, what is the best way to achieve this on the various US stock exchanges? How do you manage this for large orders and/or in illiquid markets? Also, what are the mechanics for doing this? I believe the NYSE and AMEX accept MOO/MOC (market on open/market on close) orders, but the Nasdaq does not.
Can you enter these orders fairly anonymously so as to avoid tipping your hand to the specialists/market makers? To be clear, I am trying to find a way of achieving the opening or closing price with minimal slippage. Thanks in advance for your insights on this. -- CPTrader
Any person or institution can enter MOO or MOC orders either directly via SuperDOT or through his/her/its brokerage. This will be relatively anonymous; generally just the broker's "give-up" (acronym) shows up on the order.
As far as getting decent prices goes, it depends a lot on supply and demand on that particular day. Illiquid stocks will obviously move more than the blue chips when hit with large blocks.
Another approach that is getting more popular, especially with institutions, is the volume-weighted average price (VWAP) order. Instead of working orders (floor brokers doing their best to get proper pricing), you can place an order that guarantees you the volume-weighted average price of the stock that day. Many firms will execute these orders for a slightly higher charge.
OPEN BOOK
I noticed that some orders just don't show up on the open book. For example, say I have a limit order at the best ask price. When I cancel my order, another offer at one or two cents above me shows up as the best ask quote, but it is not on the open book. I try to cancel and put back my limit orders, and the same order will show up on the quotes (whenever I cancel my order) but not on the open book. I am just wondering if this is due to specialist orders or something else. Curious minds want to know. Thanks -- danjos
Remember the hierarchy of Level I quotes (NBBO or national best bid/offer), Level II quotes (adding regional exchanges and ECNs), and then the NYSE open book (or NYOB). In practice, you cannot even have NYOB and LII quoted together; they are different animals. On our systems, the LI quote is shown on the main quote window, while LII shows up in a stock-specific montage showing share sizes attached to various quote prices. We then bring up a separate montage that shows the NYOB quotes with share sizes. I only bother with NYOB 90% of the time. This gives you a view as to where the larger orders are placed (usually at 0.05, 0.10, 0.15, and so on). The "world" sees LI quotes, and this makes for some easy tape-reading.
We show our new people how to visualize the orders in the book. For example, for 8,000 shares of HPQ offered at 0.10, LI will flash that amount and then show 400 offered at 0.08. The 0.08 is a real order, but it is also masking the larger offer from view. Often this is not the specialist, but another trader seeking to step in front of the larger offer, or a broker actually trying to buy shares lower than the big offer price. Brokers can and do sell some so they can buy a lot.
Many of the apparent crossed markets are simply other professional traders entering sell orders below the bid (or buy orders above the offer) in order to get "guaranteed" fills. Since they are entitled to price improvement anyway, these orders are usually executed more quickly (and efficiently) than market orders.
OPENING IMBALANCE
How do you interpret the before-opening imbalances, as there is no share imbalance showing? How do I deal with a stock imbalance on the opening stock? If I see an opening imbalance, and it is the same number as the ask price, how should I interpret this? Thanks -- John
You are seeing an opening indication, not imbalance (imbalances come out at 3:40 pm [ET], except for option expiration day, when we see the shares sizes pre-opening). The specialists are simply putting out an opening range estimate -- this is done when they think the stock may open 35 cents or so away from the previous day's close.
The only day we have opening imbalances (shares) is expiration day. The rest of the time we have opening indications (price, not shares). Let me explain a bit further: The NYSE specialists receive many orders prior to the opening each day, both buys and sells, with limits or simple market orders. After reviewing these orders carefully, they project the approximate range for the opening price. If they anticipate a price more than 35 cents or so away from the previous day's close, they generally post the expected opening price range a few minutes before the opening.
We should all be aware that morning indications are giving us price ranges. MOC (market on close) imbalances are giving us actual share sizes. At 3:40 pm the specialists review all their MOC orders, match up the buys and sells, and let us know how many extra shares are either bid for or offered for sale. This imbalance is updated once again at 3:50. In both situations, the specialist is basically looking for assistance in equalizing the shares to provide an overall better price for both sides of the trades.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the November 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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