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 |
PRICING EMINIS
Where does ES price come from?
ES = (SPY price)/factor + time premiumNow that I know that emini price is not direct, what bids and asks should I look at to detect where there is more pressure to gauge the future ES or ER2 price? Should I look at SPY or SPX, for example? --RobertM
You determine short-term up or down movement of the futures by the premium or discount to adjusted fair value. You take the spot price of the S&P, and add fair value for that day (check www.programtrading.com or www. indexarb.com for the daily number; there may be a slight difference, so take the average). When there is a premium, the market has an upward bias, and vice versa when there is a discount.
GET A MENTOR
I'm an average software engineer making average money ($75,000). I have been trading on and off in a retail/semi-daytrader capacity for eight years or so. I hate my job and even quit twice before to trade but was unsuccessful due to undercapitalization of my account (I was trying to make $50,000 a year on a $30,000 account--sounds stupid in retrospect).
I have a passion for trading and can't think of doing anything else with my life. I am thinking of going the proprietary trading route mainly due to the leverage it can offer me with the side benefit of training and mentorship.
No need to overcomplicate this whole trading business. Think of it as any other business-licenses are required, some education, good relationships with others who either are or have been successful, dedication, and yes, hard work (who would have thought that those who work harder seem to make more money trading!).
Barrier to entry, if any, is studying to get licensed so you can have access to the capital necessary to actually engage in the practices that work rather than catching the falling safes like so many of the masses tend to do.
I may seem biased, of course, but my family has worked many sides of the business since the 1970s, and have tried to take the best parts of the business and put them to practice, and I feel our record speaks for itself. Our active traders' numbers are higher than they've been for quite a while.
Don't be quick to quit your job. Treat trading like starting any other business venture (Subway franchise, computer store, consulting business, whatever). Be sure you have adequate capital to trade the strategies that actually work (lower risk, higher reward, but possibly more capital-intensive than just trying "last century's methods" like scalping and momentum). Get comfortable with your knowledge of the business, how trading firms work, clearing firms, exchanges, tax consequences, and all the rest, just like any entrepreneurial venture. After you feel you're ready to compete, trade part time, opening-only strategy maybe, build up an account, put money aside for the possible fluctuations. Don't go into this undercapitalized or on your own.
VOLUME IN THE S&P EMINI
In my quest to understand more about who trades the most volume in the S&P emini, I came across a paper about bid/ask spread and tick size with relation to the S&P futures and the emini contract. The paper worked out that the locals in the large S&P contract account for as much as 45% of the volume on the emini and that they act as liquidity suppliers just as much as liquidity demanders and that the exchange locals tend to trade aggressively to exploit their informational advantage derived from their access to the open outcry order flow.
What is your take on that and if the rest of the volume on the emini is split between the broker?dealers hedging themselves and the arbitrage/premium trading firms? --Tim Higgs
Good question! Since the floor traders of the big contract are the official market makers for the contract, it makes sense that nearly half of the volume would be executed by them. There are, of course, crossed trades (that is, trades made broker to broker) that account for a certain amount of the volume as well.
The edge that you mention from the order flow is there, and yet it takes time for floor traders to develop a "know when to hold 'em, know when to fold 'em" strategy. I mean that newer traders tend to want to participate in every trade, and seasoned traders know when to wait for a bit of intraday movement. For example, a broker may have 100 contracts to sell with a 1250 low limit, but the contract is trading at 1251. The newer traders might jump to pay 1251, while the more experienced traders will wait for a 1250.75?1250.50 trade, and then take the last number of contracts.
I think the eminis have been a great contract for arbitragers and other program traders. The liquidity here is provided by these large trading groups, which gives great access to the small five-lot traders. The futures are more of a leading indicator for most of my equities traders, since we use premium and discount to fair value during each trading day.
Email your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the September 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
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