Since You AskedQ&A
Since You AskedConfused 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. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
NEW TRADER, NEW QUESTIONS
From Claude Moran: Mr. Bright, I’m in my late 20s and have just started a career in professional trading. I have my license, have put up my own capital, and get to keep most of my trading profits. I have read your column in Stocks & Commodities for a long time, and I do my best to digest your responses when they apply to my situation. Like your firm, I stick with equities and trade stocks and exchange traded funds (ETFs) exclusively. I hope you won’t mind answering some basic questions. Here we go:
1. I have a mentor who likes to trade from the news on individual stocks. He pays for several services that give him news before anyone else gets it. I am skeptical if this is really true. And do you have experience with this type of trading?
Don Bright answers: Please feel free to ask me anything about anything to do with the markets and trading. Now, as to trading “news stocks.” This is a tough and competitive portion of trading. My opinion is that “someone always knows things before I do.” Period. That said, there are traders who have developed computer programs to search multiple data vendors for keywords, news items, things like “dividend,” “increase,” “sales,” and so forth and will immediately check out other symbols in the same sector(s) and execute trades immediately. That level of sophistication is not extreme these days. So if you think you can compete with this, then feel free.
Don’t get me wrong, you should always be aware of the news about your basic stocks. If you are a directional trader, you are constantly concerned about any and all news. If you are a hedged trader, perhaps trading correlated pairs, then you limit your risk considerably since paired stocks tend to follow one another. Be extremely cautious about diving into stocks you are not familiar with based on news items.
2. I have a question about dividend plays. I trade some pairs, which I know your firm does as well. Do you think there is an edge trading dividends in pairs?
I prefer to find out what works and then automate it, not spend time and money developing a program based on what-ifs.Don Bright answers: This is a subjective, time-intensive methodology. You really need to do your homework on your pairs, the viability of continued dividends, and who the major shareholders are in these tradables. Obviously, you want to hold the stock on ex-dividend date and hope to recoup the price drop the following day or few days. Keeping the other stock involved in the pair again reduces your overall risk. When done correctly, this strategy works. Now, readers should be aware of the new tax consequences for dividends if you’re trading retail that come into play in 2013.
3. One last question about subpennies, high-frequency trading (HFT), and automation. Some say that daytrading is not working due to HFT and subpennies. Do you feel this is the case? How is your firm dealing with all this? I’m thinking about paying someone to help me write a program to enter orders and exits, hoping to keep my subjective nature out of the equation.
Don Bright answers: Once again, this is a tough question to answer in this forum. My feeling is that you must first develop a good, solid strategy that can be done manually. When I emphasize “can,” I simply mean something that works but can be improved upon via technology. For example, we have been trading the opening-only strategy for decades — basically, placing orders at predetermined prices before the open, hoping to get filled on extremes and then covering with profits. We know it works. We have written many different programs to automate this process, which allows us to trade more symbols and more shares. We can also place immediate retracements (taking profits) instantly. This, of course, can make for more profits.
We have developed programs that can be modified easily by the traders to fit their needs. Openings, fishing orders, MOCs, and even pairs strategies can be performed well with these systems. And of course, we can use the Goldman Sachs Automated Trading System (ATS) as well. I prefer to find out what works and then automate it, not spend time and money developing a program based on what-ifs or wishful thinking.
Hope this helps.