Q&A

PARAMETER EQUATION?

Say a stock is priced at 30 and trades one million shares per day. If you place a buy market order for 1,000 shares, to what price do you drive up the stock? This assumes that had you not entered the order, the close would have been 30. Basically, I'm looking for an equation having parameters: price, average daily volume, and order price (and I know this is difficult) for how much you affect the price of the stock. Thanks.--Sky123987

There is absolutely no way in the world to know anything like this, regardless of what others may say. This is a marketplace, and much like any other free market, you have buyers and sellers with different agendas, different hedges, and perhaps 100,000 shares or more of "iceberg" orders that don't show up in NYOB or Level 2. ("Iceberg" orders are where the actual share size is not displayed.)

Our traders are taught to watch the actual trades, not just the number of shares being bid for or offered. That way, they can tell if there are hidden orders, or trades from the "dark pools." Here's where to check: www.redi.com/forms/algo720.pdf.

You may actually get price improvement from National Best Bid or Offer (NBBO) based on proper routing (SigmaX, in our case).

VARIATION ON A THEME

I submitted a limit order to narrow the bid-ask spread and I actually got a price improvement! Why does this happen? -- bidask

Several reasons could apply. First, there may have been a better price on another market center (ECN and so forth) between the NBBO, which requires the orignal market destination to forward to the better price destination. This is due to the National Market System (NMS) rules.

In addition, there are "hidden pools of liquidity" out there that are often priced between displayed bids and offers. Major firms have millions of shares offered and bid for in these pools. You can learn a bit more about that at www.redi.com/forms/algo720.pdf.

Another way for this to happen is you may send in an order at a certain price, but immediately after that, a better order comes in where they fill your order.

Sometimes there are iceberg orders. And sometimes there are orders that are not displayed.

Hope this helps.

IS THERE AN X FACTOR?

Can anyone be trained to trade for a living? Is there some type of X factor involved? -- Anonymous

My answer is a resounding "yes and no." I have worked with hundreds of professional, full-time, and part-time traders over the last three decades or so, on various trading floors and within various trading venues. A great deal can be "taught," such as working strategies. But a great deal cannot. The results have ranged from astronomical successes to dismal failures (and that really concerns me). It's the same thing on the trading floors.

Somehow, there is something that some traders have and others don't. That doesn't mean you can't be trained to make money trading; many can, but the level of success varies greatly. The "love of the game" has a lot to do with it. Understanding that there are no absolute systems in the markets has a lot to do with it (so many traders spend so much time trying to fine-tune something that may be flawed from the get-go).

Understanding the risks and the rewards has a lot to do with it. For example, studying how to play blackjack correctly can certainly help you become profitable, but the level of success varies from player to player. A computer cannot beat the casinos (many have tried over the years). After all, you must have casino knowledge to get away with counting cards. I was barred as recently as last weekend. I think I got greedy (and that has something to do with this discussion as well).

E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the September 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.