Q&A

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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

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TAPE READING

Here's a scenario for you:

ABC stock is presented at 100.00 (56k) X 100.05 (100)

All other factors being equal, for the sake of discussion, do you:

(A) Go long at the bid?
(B) Go long at the offer?
(C) Short at offer? or
(D) Place short at bid?

Thanks for your input. -shortseller

Since this is just one part of many overall tape-reading data, there is not nearly enough information to make a decision. For example, what is the depth of the NYOB? What is the Prem or Disc to FV? Tape reading is all-encompassing-it's more than just looking at a simple Level 1 quote as it comes up on the ticker.

That said, we never teach our traders to get in front of a large order, because price moves to size (and through, quite often). Instead, we teach that more often than not, the "not so well trained" guys place orders a penny or two in front of big orders, thinking that they have a great stop-loss just a penny away. And as we all know, that's rubbish… when the offer goes, it goes all the way, and these guys scramble to cover shorts and so on, running the stock up through that big order price.

To explain how tape reading is all-encompassing, I use the analogy of first learning how to drive. At 16, you remembered each little step: Get in the car, check the mirrors, look left and right, put the clutch in, turn the key, put the car in gear, check the traffic, ease the clutch out, and pull onto the road. Now, replace all the car stuff with stock indicators. In both cases, after a while, we simply get in the car and go. We still do all those same things; it's just that we do so almost subconsciously.

I verbalize what I see to all of my students, and show how we can see immediate directional movements and sizable prints (anticipation thereof). Then I have other trainer/traders do the same thing to show their different views, and hopefully, the students start to internally verbalize for themselves. You would be surprised how well this works.

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PROVIDING LIQUIDITY & SEEKING DISPARITIES

I attended one of your workshops last year, and you and your brother mentioned that all trading breaks down to only two things. I think you said one is to provide stock; what is the other one? -stockstudent4

We generally try to break all trading down to two things, "providing liquidity" and "seeking disparities." What we mean by that is that our traders often have bids and offers on the same stocks at the same time. This helps to keep the pricing of the stocks more stable, and, if done correctly, provide the trader with a financial reward for doing so. We often trade on the same side as the NYSE specialist, actually participating in his trades. We also participate in market-neutral spread strategies where we look for valuation disparities between two or more stocks. If we see two companies in the same sector with widely different valuations (price to book, P/E ratio, for example), then we tend to go long the better-valued company and offset this by shorting the company with the lower valuations. We also look for market moves where one stock has moved too much in comparison to one of its peers, and we position ourselves accordingly.

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SCALPING NYSE & ECNS

I'm trying to learn about scalping listed stock, and since you are the listed guru, I thought I'd ask you some questions. When you are trading, do you prefer to go to the specialist or to ECNs when you need fast execution? Which of the two do you think tends to post wider spreads? -liltrdr

You might want to check my article called "Price Vs. Speed" (Technical Analysis of STOCKS & COMMODITIES, July 2004). I go into depth about why I prefer trading with the specialist. Remember, we can always use the NYSE "ECN" (the NX function) if we want quick executions - but I prefer getting the best price over the quick execution. Most traders who understand the "fine points" of trading tend to agree with this concept. For example, if you make only 20 trades per day of 2,000 shares, and get three cents price improvement on half of them, that comes out to more than $100,000 per year "extra" income. I will agree that in some cases, speed is important, most notably when news items or government numbers are involved. But for the most part, the price improvement outweighs the "need for speed."

Unless government numbers or news items are involved, the price improvement outweighs the "need for speed."

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

Originally published in the December 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.

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