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. |
Don Bright of Bright Trading |
AND NOW, SOME DEFINITIONS
What are flippers? What do they do? Are they legal? And why are so
many people complaining about them? Thanks.-Richard Wong
First off, a definition: For our purposes, a "flipper" is a short-term
investor or daytrader who buys pre-IPO (initial public offering) shares,
swiftly spinning them out into public markets for a quick profit. According
to an online reference guide, flippers may hold a stock for only 24 to
48 hours. The other "flipper" term you may run across applies to those
who buy and fix up houses to "flip" at a profit.
As far as people complaining about either kind of flipper is concerned,
the other side of the equation is that these flippers provide much-needed
liquidity in these new issues, and in the housing market as well.
Those who complain about the IPO flippers are probably the much-larger
group of investors who are not given access to IPOs. IPOs are generally
offered to higher-volume investors who spend a lot of money with a retail
brokerage, and can be thought of as discriminatory.
ARBITRAGE TRADING AND SO FORTH
I developed several simple models that track various price relationships
in the Standard & Poor's 100 baskets, typically, when price gets pushed
too far out of sync. It looks to me that a lot of the intraday turns on
the S&P 100 and the S&P 500 are driven by arbitrage or basket/portfolio
trades based on fair value calculations. But when I look on the NYSE website
and look at their weekly published reports, they say that on average more
than 55% is program trading, but only about 8% is down to index arbitrage
trading. What are your thoughts on that, and does arbitrage trading constitute
a lot of the intraday turns in the market? -Raker
The percentages you state are pretty accurate, but you have to understand
that just because program trading "triggers" are set off, there is not
necessarily a trade being made with the basket and the index/futures. The
buying of the futures at a discount, and shorting the baskets, then selling
futures at a premium and buying back the baskets is still a viable strategy,
but not the only strategy involved in program trading. Options are often
used, too.
Here's a definition of program trading, thanks to the good folks at
H.L. Camp (www.programtrading.com):
Program trading is a generic term used to describe a type of trading
in securities, usually consisting of stocks traded on the New York Stock
Exchange and their corresponding options traded on the Chicago Board Options
Exchange and/or the American Stock Exchange; and, the Standard & Poor's
500 index commodity contract traded on the Chicago Mercantile Exchange.
The trading of these items is based purely on their price in relation to
each other on a predetermined basis; and not on any fundamental reason
such as an individual company's earnings, dividends, or growth prospects;
or on any overall economic reasons such as interest rate movements, currency
fluctuations, or governmental or political actions.
When triggers are set off, it adds to a move in the market based on
buy or sell programs. You can check these levels daily at the programtrading.com
website. Our traders are cognizant of the levels of premium/discount (to
fair value) that these programs kick in. This information is part of the
larger picture of tape-reading that we employ. We trade individual stocks,
pairs (www. pairtrader.com), and baskets of stocks, and use the futures
primarily as the leading indicator for short-term market direction and
reversal. We have to add, of course, such things as pivot points, New York
open book (for depth and breadth of individual markets), Level 2 for NASDAQ,
and other indicators such as the tick and TRIN, and so forth to make our
entry/exit decisions.
I hope this helps. Keep up the good work!
THE IMBALANCE OF POWER
Dear Mr. Bright, I have the RediPlus screen. I have set up a quote
monitor and imported the field "imbalance." Do I have to manually put in
the symbols to watch for an imbalance, or is there a way to have RediPlus
scan all symbols looking for an imbalance? What other fields do you include in the quote monitor? Thanks. - Norman J. Hauge
There are a couple of things you can do. First off, you can put in the
individual stocks you want to monitor on your quote window, as you described.
Another thing you can do is click on the various indexes in your index
window, and put in the imbalance column. For example, click on INDU in
the index window, watch the 30 stocks that make up the Dow Jones Industrial
Average, and put in an imbalance column.
You can also use RediLink on an Excel spreadsheet (see "add-ins") and
then type in, for example, the Standard & Poor's top 100 (OEX) list,
and you will see the imbalances that way. Various news services also provide
the information, Dow Jones and Reuters for sure. Good luck!
E-mail your questions for Bright to Editor@Traders.com, with the subject
line direct to "Don Bright Question."
Originally published in the December 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis,
Inc.
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