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.

Yahoo open
Why does Yahoo! Finance list the opening price for the Dow Jones Industrial Average (Djia) at 8,146.82 when on the daily chart at 8:30 the price is 8,167? This may be a newbie question, but I sure would like to know. Thanks. —newtrader80

The opening price on the Djia is the same as the closing price from the day before. What happens is that you may see other data vendors using the 9:30 a.m. snapshot where perhaps a few Djia stocks have opened.

A similar thing happens with individual stocks. You have what is referred to as “primary market” (Nyse, for example) versus “consolidated market” pricing used by different vendors. For example, I use primary market for all my quotes through the GS Redi platform so that I am sure of the actual opening and closing prices. Some of our traders opt for the consolidated quote that will take that same snapshot at 9:30, which may be premarket pricing on the various electronic communication networks (Ecns). Hope this helps.

Ultra ETFs
I have been using the Spy Etf (the exchange traded fund for the Standard & Poor’s 500) over the last couple of years. I’ve been doing fairly well but lately, with less market movement, I’ve been having a harder time making any money. I started watching the ultra long and ultra short Etfs lately and noticed that they move more. There is so much conflicting information about how these move with the overall markets. Can you shed some light on the new Etfs? —investor82

Good question, and yes, I might be able to help. Please be aware that these “ultras” (twice and three times long and short funds) are actually designed for daytrading. It’s not often that you see in a prospectus something said to that effect, but many do. These index funds are rebalanced each day, and they can be very painful if held for the long term. For example, say you pay $100 for the Spy. If it goes down 10%, you are at $90.

Now say it goes back up 10%; you are at $99. Not a big deal. Now, let’s use a “triple” Etf. You pay $100, it goes down 10% multiplied by 3 or $30 to $70. If it goes back up 10% multiplied by 3 (from $70), and you only get a $21 retrace, leaving you at $91, that’s a big loss for a single trade. That said, in these times of overall lower volatility, many of our traders love to daytrade these instruments. Good daytraders can read the markets well and they like to see more movement.

Smart order routing
My broker has what they call a smart order routing system, and I don’t really understand what that means. I trade both Nyse and Nasdaq stocks, and I would assume I want my orders to go to one of those exchanges. Any help would be appreciated. —KentuckyKing

Sure, routing of orders has gone through some serious changes over the last few years, some good, some not so good. First off, if you’re trading retail, there is a strong likelihood that your orders will first be routed to your broker, regardless of how they market “direct access” since they must verify you have enough funds to cover the trade. Some prefer to route directly to the Nyse, unless there is a better price available on another marketplace. This routing can certainly help, and to the benefit of smart routers. In addition, even if you route directly to the Nyse with a 40.65 bid, but there is an offer on Arca, they will reroute to Arca. The concern here is that Arca will charge you for “taking liquidity.”

I suggest that you consult with your broker and fully understand the taking and providing of liquidity payment plans they use. You can “park” an order on Arca and get paid for it, but if you take an order from Arca, you pay extra for doing so. Routing expenses can add up for an active trader.

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

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