Since You Asked
Confused about some aspect of trading? 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
COMMENT TO JUNE COLUMN
I was reading my June issue of S&C. I always enjoy reading your column very much. I wanted to respond to your reply to a question about whether technical analysis works: No one would ever enter into a good technical setup with bad momentum, bad earnings, wide spreads, poor trending. My best trades are when all the bad news, bad earnings, bad momentum, and so forth give me an entry at a price I am willing to pay for whatever I trade. Same with good news driving stocks, futures, bonds, and so on into areas I want to be selling or shorting.--Steve Misic
Your comments are certainly valid. Let me explain my thoughts about entries and exits. My point is that even in the most quant-type of entry (correlated pairs trading, for example), we take into consideration all the standard market conditions before entering our short sale or purchase. For example, if the market were tanking, we would not enter our buy order until it settled down a bit for fear we would not be able to get a short sale off (during the decline).
We agree on "fading the market at times," "buy on rumor, sell on news," and all the rest.
When trading equities, we have the advantage of knowing immediate market direction from futures activity, and we can trade on the same side as the specialist by "outside enveloping"--a way to make markets without having to make markets.
HOW MANY LEVELS?
After trying NASDAQ Level 2, I was interested in trying Globex Level 2, but when I looked at the details, I found out that it only provides five levels on each side, which is really not much. Is it eSignal that offers only five levels, or is that the case for all providers? Is there another service with more depth? Also, is there a service available similar to NYOB for futures? It would be interesting to know where the large orders are placed for ES or ER2. Thanks.--Rob
Five is the maximum number of levels that the Chicago Mercantile Exchange (CME) sends, though some of the symbols have fewer than five. When I contacted the engineers at eSignal, they checked the code and confirmed that they're not limiting anything, and that this is all the CME is sending in the depth feed. As for your second question, the closest parallel to the NYOB would be the CME Globex Level 2 quotes. The eminis are pretty "thick" (that is, high volume at every tick), but you will be able to see clusters of orders with this data.
You state that a benefit to clearing through Goldman Sachs is the firm's access to shortable stocks (their enormous pool). I have been trading quite a while and was not aware that the firm you cleared through had an effect on your ability to short. I know they have to borrow the stock, but I thought it was from a general pool. I would appreciate if you could give me more insight--perhaps I need to rethink my current clearing arrangement.--Mike Schafer
The best way to show you what I'm talking about is for you to simply go to www.redi.com and see their description of "hidden liquidity pools"--not only for shorting stocks, but used for finding better stock prices.
In addition, Goldman Sachs has people who seek out large institutional and trust-type securities holdings. They make arrangements to "borrow" these stocks way ahead of time--and this is a substantial pool as well.
AND SPEAKING OF SHORT
I am a short-term swing trader. I bought Gap (Great Atlantic Pacific) two days ago. They are issuing a $7.25 dividend on April 25 to shareholders of record on April 17. Yahoo has the ex-dividend date as April 12 (today). Today, the stock dropped about $7.25, yet Yahoo and CNN Money show the stock as being positive today, obviously taking the $7.25 into account. My questions: Why did it drop today and not April 17 (shareholder of record date)? Do I have to hold until April 17 in order to collect the dividend? If I sold tomorrow morning, do I lose the dividend?--garymc
On ex-dividend date, the stock will open down the amount of the dividend to compensate for paying the dividend. For example, if a stock had a 50-cent dividend and closed the previous day at $31, and opened unchanged, the price the next morning would show $30.50 unchanged. Any up or down movement in price would be calculated based on the previous day's closing price minus 50 cents. Record date accounts for the three-day settlement period. You shouldn't lose the dividend because your sale also has a three- (trading) day settlement (one day later).
If you're trading a retail account, I would suggest checking with your brokerage firm about proper "ex" dates--they often show different dates from different sources. Hope this helps.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the August 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.
Return to August 2006 Contents