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 |
TICKER
While watching the ticker on Cnbc preopening, I note most trades
are in the hundreds of shares. After the opening, I note the trades are
predominantly in the tens of thousands per trade. Then, when I access a
Level II time and sales ticker, even after opening, I note, once again,
predominantly trades in the hundreds of shares with no sign of the big
trades. If I am looking at Level II and see a market maker showing 100s
at $20.05 (for example), what is the impact of all of those big shares
that are not showing up on my trading screen? Does it have no effect at
all on the bid/ask? Would that volume not move the stock price, even if
no low-volume trades are currently showing up on my screen?
James Kellndorfer addressed this same question in the October
issue of Technical Analysis of Stocks & Commodities, and he seems to
have no answer either. In view of the facts shown in Kellndorfer's
article pertaining to the increase in program trading with a
simultaneous decrease in small trading activity, has this caused your
traders to seek faster trades while accepting smaller gains in order to
remain in the trading business? Thanks -- Ponsinir
There are simple answers to your questions. Before the opening bell,
you may see some trading in the premarket hours. Big players don't
bother much with pre- or post-market hours trading. The reason for the
large trades right after the opening bell is also simple. During the
night, large institutions and traders place opening-only orders, either
at-the-market or with price limits. The specialist matches up all these
orders and determines a fair opening price of tens or hundreds of
thousands of shares. Many traders are taught to fade the opening and
place opening-only orders, only to close the trade during the first few
minutes of trading. This partially explains your first question.
Now, when you look at Level II, you are seeing simple Nbbos (national
best bid/offers) from Level I, along with the various electronic
communications networks (ECNS) and perhaps the regional exchanges. Most
Ecn trading tends to be smaller retail traders, so therefore you see
more frequency but smaller share lots. If you subscribe to the New York
open book, then you will see the larger institutional orders. As an
example, I'm looking at Time Warner right now. The Level II montage
shows a Nyse bid size of 5900, ArcaEx with 100, Inet with 100, Nasdaq
with 100, and so on. The Nyob shows 6,000 (16.38), 14,300 (16.37),
11,500 (16.36), and so on. These are real orders that do not show up on
Level II. Level II has lost much of its significance since they started
giving it out free to retail traders about 10 years ago.
As far as impact on pricing goes, we look at the Nyob for target
prices (large orders) and depth of book. We also look for "air pockets"
where there may be a nickel or a dime between large orders. This is all
a part of effective tape-reading.
Now let's look at the Nyse definition of program trading, and try to
explain how the volume/pricing affects the markets:
Program trading encompasses a wide range of portfolio-trading
strategies involving the purchase or sale of a basket of at least 15
stocks with a total value of $1 million or more. Program trading is
calculated as the sum of the shares bought, sold, and sold short in
program trades. The total of these shares is divided by total reported
volume.
This is not the only way to measure program trading. Three
alternatives for October 18-22 would be to:
a) Examine buy programs as a percentage of total purchases
(25.7%);
b) Examine sell programs as a percentage of total sales
(25.6%);
c) Examine program purchases and sales as a percentage of
total purchases and sales (25.7%).
--from NYSE.com
Now, as far as adapting to the marketplace goes, our traders employ
several strategies, including program trading. Program trading is a
methodology, not a menace. There are so many strategies that involve the
use of automation that it's possible for both sides of a single trade to
make money overall that day. Some use option strategies, some use the
futures, some utilize correlated pairs trading strategies
(www.pairtrader.com), and some simply learn how their core stocks trade
and trade off of relative strength. With lower volatilities, we can make
the same kind of money, with lower risk, by simply increasing our share
size. Increasing share size per trade can actually lower your overall
trading costs, which is another benefit.
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the February 2005 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2005, Technical Analysis, Inc.
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