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.

Before the open

Don, I was wondering if you could answer this. I have heard that there is a data source that tells you the estimated opening of Nyse stocks before the open. Have you heard this? Thanks. — Sky123987

I’ve not heard of any particular site, but I can tell you what we use. We see premarket imbalances (excess shares) of opening-only orders, and Nyse specialists sometimes publish an estimated opening price range as well. We also look at the electronic communications network’s (Ecn) trading levels, premarket. This helps considerably with our opening-only order strategy by allowing us to adjust bid and offer prices. We also calculate estimated opening stock prices based on fair value—adjusted futures trading ranges as well. We take the closing price of the Standard & Poor’s 500 spot price (Spx), add or subtract the fair value number (basically the cost of carry to expiration date, minus dividends), and then compare where this number related to the emini futures (Cme/Globex) premarket. Hope this helps!

Opening-only strategy

I was wondering if you could comment on this. I’m a numbers guy, so I like to create simulations and analyze the data. I have a monster database; not only does it include prices, but news for the stock, what the market is doing, fair values, volatility index, similar sectors, and official Nyse opening prices. It’s got it all.

So I created a simulation and found that on paper this strategy does quite well. I have been trading the strategy, and I can say that my results are definitely not as good as the simulation produced.

One of the downfalls of creating a simulation is when you use conditional orders, sometimes you will be filled, and this is not possible to recreate in a simulation. So I’m trying to find out why my real-time results are not close to the simulation.

I have been trading a lot of stocks, some liquid, some not. For example, Xyz closes at 100, and when I send my order in, the expected value in market opening is exactly zero. Say I do a 2% envelope, so I send a sell Opg order at 102. Here’s what the list of orders looks like:

    102     1,000 shares
    101.50  2,000
    101.47  2,000
    101.40  1,000

So the specialist, whom I assume knows where the stock is heading, doesn’t anticipate any institutional activity after the market opens and believes this stock is going to sell off. There is a buy imbalance, so he fills up to 101.50, then notices he needs to fill 10,000 more shares, so he parks an order at 101.99 for 10,000.

We open at 101.99, I don’t get filled, and the stock comes crashing down. In my simulation, which matches it decently but not perfectly, notes the expected opening to be down 0.001%. So it places a simulation order at 101.99 and counts me as being filled.

Is this a legitimate concern? Is this trouble enough that in order to avoid or minimize this, I am better off doing it on liquid stocks? —Sky

What you bring up are three separate factors. One is, as mentioned, the size of the order. At Bright Trading, we tend to limit to only 2,000 shares per order for most stocks. So sizing is important.

Second, you’re assuming the specialist “knows” where the stock is going — that’s not always the case, trust me. As with the market on close imbalances, brokers and traders have orders that can and will be placed upon seeing the opening price. These orders are unknown to the specialist (and his algorithms).

And third, simulations don’t and can’t take into consideration all the variables involved. To prove this, you could put in 100-share orders, with tighter envelopes to assure fills and retracements (just a suggestion).

The opening strategy is a numbers game, and the successful numbers come from decades of trading it.

Level II

I am a fairly new trader, and everyday I learn something new. The greatest thing I’ve learned is that there are things you get from eight hours a day screen time that you can’t find in a book. My subconscious “knows” things and has been getting me out of trades before they become a problem. I often get these signals from watching the Level II screen. I can’t pinpoint it, but I must be picking up on something when I get these “bad feelings” about a trade.

Where can I get more information on Level II action? I see strange things all the time, such as a 100-share print at a price far from the best bid/ask that forms a candle spike but affects nothing else; and lots of prints going off at the ask when the bidding is sparse.

I have to make a living off a $60,000 account and as of this month am finally managing it, so I would appreciate any help you can provide! —Donna

A couple of things come to mind. First is to determine whether you’re seeing full “consolidated” quotes and prints. You may be seeing off-market trades that take place off the system. These might be “dark pools of liquidity” (see www.redi.com/forms/algo720.pdf) or a corrective trade price. Yes, these trades can throw off your charting system. You may want to use a system that allows you to tie in trade size (volume of trade) vs. a 100-share trade.

Second, yes, there are many “games” being played. Algorithmic trading systems are set to place random bids and offers to act as deceptive orders. They can be hit by an offsetting party, thus causing the trade.

I am a firm believer in “all-encompassing tape reading,” which includes actual feelings. If something doesn’t look right, a good trader can sense it. And you’re absolutely right about screen time being beneficial.

E-mail your questions for Bright to Editor@Traders.com,
with the subject line direct to “Don Bright Question.”

Originally published in the March 2009 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2009, Technical Analysis, Inc.

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