Q&A

 

Since You Asked

with Don Bright

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 it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.

MIDPOINT TRADING WITH PENNIES
Hey, Don, I had a quick question for you about midpoint trading. Not sure if you know the exact answer, but figured was worth a shot asking you.

I have a buddy who trades Citigroup actively — he just trades to make the spread. For example, C is bid offer 4.16/4.17.

He works both sides looking to make the penny. So if he gets hit on his 16 bid, he looks to sell 17s. I told him his life would be much easier if he could sell the 16.5s (as there is always a ton of volume trading in between the spread). I told him it makes sense to work both sides (or maybe only one side if there is a huge bid or the stock is sitting on support), but then to enter a trade trying to get out for that half-cent profit, since most of the volume seems to be trading at that half cent. He told me recently that he was scratching most of his trades and the electronic communication network (Ecn)/dark pool fees were eating him alive.

He claims traders cannot enter a limit trade at that half-cent midpoint. The only way he can get that half cent is through a price improvement on a limit order at the penny or a market order. I have been told otherwise by traders at other firms. Was wondering what the real answer is. Can you tell me? Thanks.

Timely question, one of which may change by the time this comes out in 2011. Currently, we at Bright Trading cannot enter subpenny orders for stocks priced above $1.00. So your friend is correct in that statement. However, it may be possible for him to route orders via a smart order router to hit the “dark pools” first before resting on the Nyse or Arca, for example. This can be done on the back end via the clearing firm’s execution platform, or the front end via the trader’s choice. In our case, this is called “X2 directed.”

Don’t forget to consider the fees/commissions he may be paying as well. He may need to make that full penny. Hope this helps.

SUBPENNIES: LOVE ’EM OR LEAVE ’EM
I have tried to figure out why a trader, who trades for a living, is so upset by stocks trading in subpennies. Perhaps I missed a column or two of yours. Can you tell me?
— SDiegotrader

As I mentioned, we at Bright Trading are not allowed to place limit orders in subpennies, but some traders out there can, and they love them. The real concern that I have is the “tiering” of the overall marketplace. It’s sort of a “if they can do it, then we must be able to” thing. We’ve been around long enough to have traded in dollars (four quarters), 8s, and 16s of a dollar — and now to full pennies. That’s not the only problem.

The other concerns I have are “internalization” and “payment for order flow.” Both practices have been gone for a long time, but now with billions of shares traded every day, the overall effect to the markets has started to shine.

For example, an interview I did in April 1999 with The Wall Street Journal (www. stocktrading.com/ wsjsellorderflow.shtml) referred to this:

And an article referring to subpennies came out in Reuters in November 2010, thanks to one of my top traders, Dennis Dick, who has been crusading for traders and investors at defendtrading.com. The full article can be found at http://www.reuters.com/article/idUSTRE6BG2H320101217.

Hope this helps!

Originally published in the February 2011 issue of
Technical Analysis of Stocks & Commodities magazine.
All rights reserved. © Copyright 2011, Technical Analysis, Inc.