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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FILLED ORDER SPLITS

How do specialists determine the split on orders being filled? How many shares does each get, and does it depend on how the specialist feels that day? Talk about handing over a blank check. -- howardy2k

It's very important, in my opinion, that traders understand all this before they start trading. Things change and there are exceptions, but in general, you can count on five things:

1. Time priority.

2. Once you have received any part of your order (say 100 of 500), you may be on parity with other orders with the same price limit. Getting the 100 shares can be like the kiss of death, and I usually just cancel the rest, adjust the price limit, and go on trading.

3. Size priority. If your order cannot fill the matching (opposite side) order and another order can, it's possible to be sized out. This is rare, but it does happen at times.

4. Long market, long limit. Short market, short limit. If you are selling short 1,000 shares at 39.01, and there are 10,000 other people with orders at the same price, you may not be filled since you're last in line. But if they trade through your price, you will be filled.

5. Matching orders. Your order may be matched by the specialist, and/or he may share your order with another broker for fairness.

There is more to it, and the more you know, the less likely you'll be overly concerned about the trading practices.

Remember, the specialist cannot initiate an uptick or a downtick, and can only participate in an order -- he cannot take the order. He can improve price (and does on about 30% or more of my orders), and he can (and does) negotiate pricing for larger orders, and must give all the "scooped-up" orders the better price, which is imperative.

In any case, there's no right or wrong way to split orders here -- the system is what it is, and I think it's still the best system. I also think the ARCA deal will make it even better. The whole thing is like the good ol' USA: not perfect, but the best there is.

And here's a friend, CSTU, who'd like to explain further. Thanks, C:

In regard to parity in Don's explanation: It may be easier to explain by saying that all brokers representing orders have parity, rather than the orders themselves. For example, if four brokers and the specialist (acting as agent) are splitting stock at a certain price (on parity), not all specialist orders are participating. They are still executing based on time. The book (in time priority) is on parity with the crowd, and not each individual order on the book. It's a small point but shows why people can be shut out on some prints.

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NYSE HYBRID

I work at a firm where trading decisions are based on strict tape-reading and nothing else. With the hybrid system coming to the NYSE, I am worried that my efforts to learn the tape will be wasted. Your thoughts? -- spxdes

I'm actually optimistic about the NYSE/ARCA deal. This could combine the benefits of a "single place auction" marketplace and high-speed electronic execution. From what I've read, the specialist system will continue, albeit with some changes. There will be manual overrides for large orders, and I think that tape-reading as an art and a skill will be useful for years to come.

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NINE BASIC TRADING STRATEGIES

In some of your articles, you talk about exposing your new traders to the basic seven or eight trading techniques. Could you name them and explain the basics? -- Enrique Prieto

Here are nine of the basic strategies employed by most serious traders:

1. Opening-only orders

2. Scalping

3. Post-opening (sectors and so on)

4. Relative strength

5. Momentum

6. M & A spreads

7. Pairs

8. Contrarian volatility

9. Breakouts

There are more, and of course there are hybrid strategies that combine various techniques. It's important to understand what each technique involves and when to consider doing it. For example, say you are pairs trading. You generally short the appropriate stock first while looking at the relative strength of that stock vs. its peers and the overall market, being aware of the possible breakout price and following momentum. Using the trading basics for entries and exits is similar to using basic strategy when playing blackjack. You always do certain things with certain cards while changing your bet size, based on the overall card count of the deck. If you're playing breakouts, you don't buy based solely on the price of the stock; you check to see a premium to fair value in the futures, and whether the stock is stronger than its peer group.

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

Originally published in the February 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.

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