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 |
DAYTRADING: MARK-TO-MARKET OR RETAIL PRICING?
Why do daytrading firms mark-to-market? Why not account for
positions the retail way? I heard that retail firms like Ameritrade and
Scotttrade take the other side of a retail trader's trades and sell
order flow.
If the firm is taking the other side of customer's trades, aren't
they losing as well? If so many different orders are coming in each
second, how do they manage to sell order flow? How can a retail firm do
unlimited shares for $9.99? What about ECN costs? - Still learning
Glad to see that you are taking your trading seriously enough to keep
on learning. Professional trading firms use the mark-to-market method of
pricing and earnings calculations for a couple of reasons. First, since
we trade so many times each day/week/month/year, it would be onerous to
match up each trade and keep track accordingly. Second, since stock
prices change constantly, mark-to-market gives a better view of the
actual profits or losses. If you buy 1,000 of XYZ at $40, and it is
trading at $20, the trader has a better view of what we call our net
liquidating balance (the true value of the trading account).
Many retail brokers trade against their customers or sell the order
flow to another group, often a floor-trading broker-dealer. If you
review your contracts with your brokerage, you will see this practice
disclosed (but not necessarily explained). Since brokerage firms receive
orders on both buys and sells (usually market orders), they can sell to
the buyers on the offering price and buy from the sellers on the bid
price. This creates profits for the broker and is one reason that we
rarely, if ever, use market orders.
The average share size for a retail trader is somewhere around 100
shares per trade, primarily due to margin restrictions and account size.
At that rate, they charge 10 to 20 times more than a professional
trading firm. With all this extra revenue, they can certainly
accommodate the rare large order from someone with a big account
balance. They also make money on these same account balances via money
flows and interest rates. Many firms don't even care about the actual
trading, since they make so much by simply using their customers' money.
TRADE WITH THE SPECIALIST
A while back I read something in your column about "away from
market bids and offers" or "enveloping markets" that said we could
almost rely on trading with the specialist, rather than against them.
I've been unable to find this information, and I would sure like to
trade with the specialists. -nysetrader999
I think you are referring to what I call "outside enveloping." I show
our new traders how to take advantage of price improvements when the
specialist puts up a block print at a favorable price (away from the
current market).
If the market is 30.20 bid/30.24 offer, I would have a 30.17
bid/30.27 offer. My market is outside the primary
(specialist)
market or NBBO. If there is going to be a block print put up at, say,
30.05, we see the NYSE market read 30.00 bid with the same offer, to
allow for the 30.05 trade to take place within the current (immediate)
quotation. I would leave my 30.17 bid in place, knowing that if the
block trade takes place at a price lower than mine, I will be filled at
that better price. I also know that most of the time I will be sharing
in that order with the specialist. You see, the specialist can
accommodate and participate in providing shares, but cannot participate
in the selling of shares in this case.
This can be difficult, because you must learn to constantly move your
bids and offers away from the NBBO if the price creeps toward it. We
only leave our bid or offer in when the NBBO reflects a lower or higher
price.
TRADING AND POKER
I spoke to you at an expo in Anaheim this year. I played in the
(no-money entry) hold-'em poker game there as well. You had a list of
the similarities between stock trading and poker playing; would you mind
sharing that list? -Casey
I hope you enjoyed the trading show and the poker game! I have
interviewed several player/traders, and will be putting an article
together regarding this topic; look for it soon here in S&C. In the
meantime, here is the requested list of the similarities:
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the October 2005 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2005, Technical Analysis, Inc.
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2005 Contents
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