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 |
MARKET ON CLOSE ORDERS
I do not quite understand the imbalance of NYSE and NASDAQ that you mention. Can you articulate?--Kwancy
Sure. First off, the specialists at the NYSE receive market on close orders (MOC) all day until 3:40 pm Eastern; this is not done the same way on the NASDAQ. These can be very large orders where the brokers/banks/funds/institutions are willing to either buy or sell shares at the final price of the day (the closing price). For example, there may be one million shares to sell (at any price), and 500,000 shares to buy (at any price), all marked MOC. That would leave an imbalance of 500,000 shares extra to sell.
At 3:40, the specialist publishes that imbalance (I have a column for that on my RediPlus screen, and they also send it out via Dow Jones and Reuters, I believe). After seeing these imbalances, traders can place MOC orders, offsetting the imbalance only; they cannot add to the imbalance. In this case they could send buy orders MOC. Knowing this, our traders place sell-short orders first (in this case), right after seeing the imbalance. When filled, they then place the MOC buy order, which will close that trade after the bell rings with the MOC order. Imbalances are republished at 3:50 Eastern, and are often either lessened in share size, or they go away altogether. If the imbalance goes away at 3:50, you can no longer enter a MOC order.
Going back to June 30, when we had the Russell 2000 "rebalancing" take place (when the index managers added some stocks and remove others), we saw many large imbalances, so our traders did what they had to do and made excellent money. My nephew shorted Procter & Gamble (PG) right after 3:40, and right after the bell at 4 pm, the stock price gapped down 80 cents, thus giving him a big profit. PG was just one of many that reacted in a similar manner.
Our traders always look at the imbalances for the stocks they trade on a daily basis, which gives them additional information for end of day trading, even if they don't actually place MOC orders.
TRADING QUESTION
How do you know from the tape that a turn is coming? --billp
Relatively simple. Since we trade primarily big-cap stocks, we use the premium/discount to fair value of the futures, knowing full well that when they (futures floor traders, hedge funds, and program traders) can sell futures at a premium to fair value, they will likely hedge themselves by buying stocks. Add to this the tick's (when nearing 1,000, either positive or negative), and the NYOB (New York open book) layers, you get a pretty good idea of near-term turnarounds. We, of course, use SPX pivot points and SPOO pivot points as added confirmation of the movement. These pivot points act as trading channels, and when one channel is broken, its value is reversed. If 1280 starts the day as a support level, and the index bounces off a couple of times but finally breaks down through it, then 1280 becomes a point of temporary resistance. Hope this helps.
DOUBLE THE FUN
I'm not clear on what a double print is--please let me know if I am correct in thinking that a double print is two exact same size trades, at the exact same time (down to the seconds), with one trade being at the ask and one being at the bid. Is that it? --Imagine
Most of the time, "double prints" (that is, seeing two trades go up on the tape right after each other) reflect a "go-along buyer/seller," which simply means that they are matching the number of shares traded, but not initiating trades at the moment. The specialist will do this at times as well. These prints are generally the same number of shares and executed at the same price.
HEDGED PORTFOLIOS
Yes or no: "Fully hedged portfolios are not risk-free." If yes, are there any conditions? If no, why not?--OddTrader
Of course not, but if you want to get into details, it would depend on the definition of "fully hedged." If you're long $500,000 and short $500,000 of different stocks, then for risk charges (haircut purposes) you are "fully hedged"-but you are certainly not risk-free. (What's a haircut? Charges by clearing firms for additional use of capital overnight.)
If you hold a conversion, a "virtually" risk-free position where you are long stock, short calls, and long puts, you have risk especially if the stock closes at expiration time at or near the strike price of the options. Since you are long the puts, and you don't know if the owner of the calls is going to exercise their right to the stock, you don't know if you should exercise your right to "put" the stock. You could end up long, short, or flat, depending on what others may do.
The idea behind hedging is to seek disparities and hopefully benefit from them without too much fear about market movement. If you can rule out the risk of bull/bear market moves, then you have eliminated a big portion of your risk.
TRADING CAN BE THE PITS
I was told by a trader that pit-traded data is ahead of screen-based
traders by seven to 10 seconds. Obviously there is lag, but seven to 10
seconds from pit to screen for someone even in New York? So for example,
er2 mini futures contract is behind the pit-traded contract by seven to
10 seconds and the Russell index is also behind? Is this true?--Tinkerz
This is one primary reason for our traders listening to the live squawk
box from the pits. We "hear" long before we "see" what is happening, and
yes, it can make a big difference.
If you're sitting there with your finger on the trigger (buy or sell button) and you "hear" something like "Merrill took out all the 1280s and is bidding for more" -- while you see 1279.50-1279.75 on the eminis -- you can hit the buy button before others see the movement. Of course, not everyone needs that split-second edge, but it sure seems to help. If anyone wants to test it, try www.tradersaudio.com. We've found that Ben Lichenstein has done a great job broadcasting over the last few years.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the October 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis,
Inc.
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