Q&A
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. To submit a question, post your question on our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. |
Don Bright of Bright Trading
|
FILLING ORDERS
I have found your Q&A column to be the most helpful feature of
STOCKS & COMMODITIES since I subscribed, and I look forward to it every
month. Hopefully with your experience and knowledge you will be able to
answer my question.
I placed a short sale order of 400 shares of HDI five minutes into
the open (9:35:33) on October 3, 2002, with my Internet broker. It was
a limit order at 47.63. At 9:36:05 the bid-ask was 47.50/47.71, last trade
at 47.61. Shouldn't my short order of 47.63 show up? (I use eSignal and
refer to time and sales data.)
At 9:36:14, trades went off at 47.69 (two lots on the NYSE - 1700
and 400). Shouldn't my order have been done first? Then at 9:36:28, 500
shares traded at 47.60 - which should allow my short order of 47.63 to
be listed, assuming it was not done yet (the uptick rule), but the ask
continued to be reported as 47.69. What gives?
Since this is not the first time this has happened and I have gotten
every possible false response in the past (people have suggested these
were stale quotes or that there were orders in front of mine - neither
of which holds any weight), would using direct access prevent this?
Since you have mentioned numerous times that you like trading the
NYSE open, what do you recommend as a way of accessing the NYSE with minimal
cost? I heard that super-DOT might be an option. Are electronic communications
networks (ECNs) an option with NYSE issues? Am I just realizing now the
negative aspects of using an Internet broker that professional traders
already know? Your sage advice is appreciated - Dennis
First, short-sale orders are not always reflected by the specialist.
In fact, the NYSE open book states that they do not reflect short sales
at all. In most cases, it is not a big deal, since you will likely get
price improvement by selling at a higher price, and if you don't, there
is a good chance the stock will not trade exactly at your limit anyway.
Then there is the question of timing. As professional traders, we allow
a two-minute "fudge factor" before investigating any apparent
trade we feel entitled to. This allows for clock differences, the
mechanics of "matching" orders, and the like. Another thing to
remember is size priority - wherein a larger order may take precedence.
In any case, if your order is valid for two minutes, you should never be
"traded through" (traded at a higher price than your limit).
The concern over the 47.69 last sale versus the sale at 47.60 may have
been on an ECN or part of the consolidated tape (versus NYSE only). Again,
the short sales are often not reflected. The rule of thumb is that if your
order is live for over two minutes, they need to either fill or quote it
(except for short sales).
This may help ease your mind a bit: Right after the opening is a very
busy time for the specialists in New York. A few seconds one way or the
other may seem like a lifetime when you are hoping to get an order filled,
but for the most part these people do a great job. My opening-only strategy
(outlined in prior issues) allows for placing orders prior to the actual
opening of the markets, thus giving me proper pricing based on the initial
first print of the day. Getting out or closing these trades takes place
in the next few minutes, and I am subject to the same timing issues mentioned
above. Timing on an ECN is immediate, but then again, there is no single
marketplace for order distribution (which is a big edge, and makes for
easier tape-reading). Your last observation is valid; there are major differences
between the way we can handle DOT trades, ECN trades, and NYSE orders versus
retail customers.
Most brokerage firms do a good job for the investor, but few can handle
the needs of the professional trader. One major drawback is the order routing
necessary for customers (routing through the brokerage before going to
the trading floor to verify account size and accuracy of the order, and
so on) and the handling of the order flow.
Feel free to send in other examples, and I'll do my best to help. Remember,
getting price improvement generally outweighs missing that rare trade.
TAPE-READING
In your October 2002 column, the first letter, second paragraph,
says: "Next, I saw a short-seller (150,000) stepping down. I was about
to bid outÉ"
The letter and your answer say nothing about the trader's software,
feeds, and so forth. And your answer says nothing to indicate that the
trader misinterpreted whatever it was he saw. So how was this trader able
to tell? I'm trying to figure a way to recognize short sales when I'm looking
at end-of-day time and sales. (Of course, it would be even more useful
to know what to look for in Level I or II, and so on.) Thanks - Nusrat
We teach tape-reading, and use the "following a short-seller"
view as one of the primary focal points. Whenever you see a larger offer
coming down in price to reflect a legal uptick, you can assume that this
order is marked short (as opposed to long stock). The assumption is that
if they could hit bids they would, but since they cannot, they "follow
down" the last sale price (plus a penny or so). For example: for last
sale 34.05 they offer 34.06 (short); for last sale 34.00 they offer at
34.01 (short); and so on. This happens virtually daily on listed stocks.
Seeing this happen can be a tremendous edge to professional traders.
Originally published in the May 2003 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2003, Technical Analysis, Inc.
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