Since You Asked
| Here's something that's been too long in the planning: a question & answer column. Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
LEVEL II TRADING
I have been trading Level II for about three years now and did well until about a year ago. I know the market has changed considerably, but my main concern is the quotes themselves. Has something changed that I am unaware of? -- Bret E., Denver, CO
I find it interesting that most traders seem to feel that the market changed so dramatically last year. What was out of whack were the couple of prior years of the "bubble" in the Nasdaq. We simply went back to a more historical trading market, and those traders who adapted quickly were able to keep their streak going. Don't get me wrong; it's not you, it's just that you started right in the middle of all the craziness.
Now to answer your question about the Level II quotes. Whenever liquidity dries up the way it did after the decline in the Nasdaq, market makers and other traders are more wary than usual. They tend to play the game by putting up quotes and quickly canceling them when the price gets close. We jokingly call these "cancel if close" orders. Those who trade Nasdaq for a living -- market makers, mostly -- often put in large buy orders (below the best bid) when they want to sell (and vice versa when they want to buy). Then, many newer traders think there is a buyer and they run the stock up. They then sell at the higher price and quickly cancel their big buy order. Remember, trading is as much a poker game as anything else, and bluffing is allowed. Good luck.
DELTA SHORT
I have enjoyed reading your column in STOCKS & COMMODITIES, and remember that you referred to something called "delta short" (I think) a while back. Is that like a short sale? -- Carol B.
Thanks for reading the column! We are talking about two different things here. "Delta short" simply means that you have an overall short position in a given security. Generally, it means that you have derivatives (short call options and /or long put options) that allow you to make money when the stock goes south. One delta equals one share of stock, so if you were 500 deltas short and the stock went down one dollar, you would profit by $500. A short sale is the selling of the actual security when you do not own it. This is sometimes a difficult concept to grasp. What you do is offer the stock for sale on an uptick (a price higher than the last sale) and hope it then turns around and goes back down. Selling short is going against momentum, and most of our traders prefer to use the derivatives.
PACIFIC STOCK EXCHANGE
I read about the closing of the Pacific Stock Exchange in California. Do you think there will continue to be exchanges, or is the future going to be all electronic? -- tradeone1, via e-mail
I think there is going to be both. The New York Stock Exchange (NYSE) has added its own electronic communication network (ECN), NX, yet we need to have a centralized marketplace with the specialist who can match orders prior to openings and closings. It is my understanding that the ARCA ECN actually moved into the old Los Angeles trading floor. In my opinion, we will have a constantly evolving marketplace that will make trading better for traders and investors.
OPTION-STRATEGIES
I'm writing my thesis about the empirical results of different option strategies: (long/short) strangle, straddle, butterfly, condor, seagull, bear/bull-spread, ratio-spreads -- and covered call writing and protective puts. Does anyone have empirical results about these strategies, or is there anybody who knows where to get this information? -- Andre
Options As A Strategic Investment and follow-up books by Larry McMillan will give you some of what you need. Best of luck.
BEST TRADING SYSTEMS/DIRECT-ACCESS BROKERS
I have been lucky enough to limp through a daytrading routine using a discount broker but still make money. However, I am now searching for some ranking or wisdom from successful active traders about whose trading systems and which direct-access brokers rank among the best. The world's mathematicians, statisticians, and market technicians have already developed very successful trading systems. And with direct access available, I have to believe there are plenty of systems that provide "canned" solutions or indicators -- for example, the system will tell me what to buy or sell -- and direct access.
I do not have a system of my own that I need to backtest. Whose system consistently ranks among the top? Is there an independent ranking out there somewhere or readers' choice survey that is current? I trade stocks now, not options or futures yet. I resist endorsing or plugging any specific product online as a rule, but I am desperate for your wisdom, and I will not consider recommendations as an endorsement, but more likely the general wisdom of the collective trading community of which you are a part. -- Michael D'Arelli
I sometimes get in trouble when answering this type of question. Whenever I give a presentation on proprietary trading, I generally start off by explaining that there is no system out there that will make you a penny. This doesn't mean the programs out there aren't of some value for calculating spreads, pairs, and the like, and giving you a good tape to read, but they are all about the same. What happened is that there were several independent software developers coming up with what turned out to be virtually identical programs. Then some of these software developers could not sell their programs to anyone, so they proceeded to open up brokerage houses to lure traders with the promise of exclusive software that would generate profits. Based on the poor showing of the retail trading community, this plan obviously didn't work. Traders need to understand that 90% of trading has little or nothing to do with datafeeds, filters, charts, and graphs. The best system is the human brain when properly trained. So take your choice on datafeeds, and good luck.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US. E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
From an article originally published in the September 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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