Q&A
Since You Asked
| 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
|
TRADING AT THE CLOSE
My interest was piqued after reading your response in the July
2003 S&C detailing the RediPlus order imbalances and how they can be
used to trade at the close. Could you please go into a little more detail
on how that works? How can I take advantage of those orders, since they
are market-on-close/limit-on-close? Aren't these orders executed too late
for a nonprofessional trader to utilize for a quick scalp? Thanks for
your help.
Let's do a quick review of what it is that we're looking at 20 minutes
before the closing bell (with a repeat at 10 minutes before the close).
Market-on-close (MOC) orders are submitted to the Nyse specialist all day.
These orders guarantee the closing price (the last print of the day) to
the order holders. There is no price limit, only a buy or sell designation.
If there were more buys than sells, the imbalance when published would
show a buy imbalance. This is viewed in number of shares. Be sure to note
the distinction between "imbalance" and "indication"
(indication shows price, not share size, as in preopening indications).
Now, imagine you've been trading Ibm all day, and you find yourself
a little long half an hour before the final bell. You might be thinking
to yourself, "Heck, I may as well sell this, the market is going sideways."
Then a little voice in your head reminds you that the MOC imbalances will
be showing up on your computer in a few minutes. You decide to wait. You
see that there is a big buy imbalance and are able to take advantage of
a slight upward movement in the stock.
As traders, we don't look at any one indicator as the holy grail. We
do, however, like to see our stocks respond to imbalances and trade them
accordingly. If we see a repeating response to imbalances, then we can
respond to that. Of course, there are other plays that use the same information.
NYSE LIQUIDITY QUOTE
I was wondering if you have begun using the NYSE liquidity quote
for any of the group of stocks they are testing it on. Can you please tell
me how it differs from "open book" (I went on the NYSE website
to read about it, but I'm not sure I understand it fully)? More important,
how can we as traders use the liquidity quote in our trading? Do you think
it offers any advantages for daytraders? Does it help when enveloping,
and so on? Thanks - Guy Truicko
The jury is still out on the liquidity quote... yes, I have the NYLQ on
my Redi machine. It is limited to only a few big-cap stocks at this point.
I have opened two montages, one with the NYLQ and one with the NYOB (New
York open book). For example, right now I see GE with a 29.88 bid and 29.98
offer on Nylq, and I see a 29.92 bid and 29.93 offer on the NYOB. The liquidity
quote shows a 11,900 bid, and 31,500 shares offered. The NYOB is more like
1,500 bid and 2,200 offered. Since the "outside" quote is a few
cents away from the "inside" NYOB, I read this as a fairly tight
market for the average trader. We like tight markets for the most part.
If I were trading institutional money and needed to move 25,000 shares
in one pop, then the NYLQ would certainly be helpful. On the other hand,
since the NYLQ is moved around as the market conditions change (and orders
are added or canceled), I find that I cannot totally use these disparate
numbers for any major benefit. Much like Level II on the OTC (over-the-counter)
market, just because we see a quote that is "away" from the market
does not mean that we can use this information for our decision-making
process.
As most of you know, I am a fan of the listed markets, and realize that
the NYSE specialists perform a much-needed function - and as the technology
changes, so will the way we visualize the markets' movements.
I look for "air pockets" in the NYOB, and will likely see
the same thing with the NYLQ when I am enveloping. Look for "brick
walls" and large sizes at various pricing points. These barriers will
work as short-term support/resistance levels. Bear in mind that these are
liquid numbers and are being revised constantly.
PAIRS TRADING
I pair trade AU/Nem. Today (Friday, August 1) AU announced a $0.51
per-share dividend. The ex-dividend date is Wednesday, August 20. I have
no experience with trading pairs going ex-dividend, so I would appreciate
your expertise on this question.
Assuming AU/NEM continues trading with a normal spread (and that's
a big assumption), would it make sense, because the specialist is going
to reduce AU's opening price by the amount of the dividend on August 20,
to buy AU and short NEM on the open that day? My thought is, with AU's
price reduced by the amount of the dividend, this increases the spread
and AU/NEM will seek the former equilibrium by either AU going up or NEM
going down. Thanks for your help - Jim Schumacher
Since the short party in the transaction is responsible for paying the
dividend, and given the fact that the stock will open down $0.51 (unchanged),
you would be relying solely on market movement. Dividend plays are done
by option professionals, and it's tough to get any "free money."
You might try it small to see how it works out.
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the November 2003 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2003, Technical Analysis, Inc.
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