Q&A
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 |
TRADING IN FLAT MARKETS
First off, I read your column every month in STOCKS & COMMODITIES, and I like how you answer questions directly without fluff. How do professional traders deal with a relatively flat market such as the one we have been experiencing for the last few months? In addition, I have noticed that the overall trading volume has been down for a while. Does that affect those who trade for a living? - Ben, Salt Lake City
Thank you for the kind words! Good questions. I am asked the same thing almost daily, it seems. Those of us who trade for a living get used to adapting to various types of market conditions. For example, when our individual stocks have a lower volatility, we are inclined to increase the share amount of each trade, and try to go in and out of the same stock with a smaller amount of profit. In addition, we are constantly looking for new methods to include in our trading arsenal. We search for new opening and closing (price) trends, automate our searches beyond the normal "filters" utilized by the "packaged" software developers, and so forth. Our momentum traders are realizing that they must make use of the new tools available to make up for a lackluster marketplace. As the overall volume has decreased, we make sure that we don't overtrade (a definite no-no), and look for more arbitrage and pair trades to make up for the momentary slowness. We expect things to pick up after Labor Day. Good trading!
QQQs ON THE NYSE
I have been trading for the last three years, mostly futures, indices, and options on equity stocks. I have done pretty well trading the QQQs, and have made a little with time premium by selling covered calls. My question is, what do you think will happen to the QQQs now that they are listed on the New York Stock Exchange (NYSE), and will the markets remain the same? - Q-Trader, Seattle, WA
Let's talk about the expansion of the QQQ (Nasdaq 100 shares). The primary market for this product has been the American Stock Exchange (AMEX), which has a hybrid specialist system. By "hybrid," I mean that there are many traders in the trading pit in front of the specialist. This allows for more liquidity, but sometimes causes a lag in execution time. For several months, the QQQs have been trading quite actively on the various electronic communication networks (ECNs) (Island, Arca, and so forth), which has added greatly to both the liquidity and the pricing. The inclusion of the Big Board (NYSE) to the QQQ listing should do nothing but add to both liquidity and pricing. The Chicago Board Options Exchange (CBOE) has started trading them as well. I have already noticed that the market size on the NYSE is much larger than the other markets.
Today, for example (August 8, 2001), I have noticed several thousand-unit markets for the QQQs (equals 100,000 shares) on both sides (bid and offer). I have noticed that the ECN traders seem to be leaning on the Nyse offer, a fairly common practice with stocks. If the NYSE shows 50,000 shares offered at 42.34, then the Ecns may show 2,000 shares offered at 42.32 or so. Be careful when doing this, because when the market moves, that big offer will disappear in a heartbeat! This applies to stocks as well.
When generally less experienced traders see a large offer, they automatically think there is a big seller and the stock will likely go down. In reality, the specialist will not show the big offer unless asked to do so by the executing broker. The broker, in turn, would not show the offer unless he/she thought there was a big buyer around. Many times, the buyer will wait and buy from the less experienced traders who lean on the bigger offer, then buy the entire offer and bid for more. This causes a temporary short squeeze and a quick upward move in the share price. Keep this concept in mind: Remember, much of trading involves understanding the motives of the players in the game. Hope this helps.
EXCHANGE TRADED FUNDS
You have mentioned many times that investors should look at exchange traded funds as an alternative to mutual funds. Could you explain why you prefer them, and how we can trade them online?- No name given
A very timely question. First off, let's explain what exchange traded funds (ETFs) are. An ETF is a fund made up of the components of an index such as the Standard & Poor's 500 (SPY is the symbol) or Dow Jones Industrial Average (DIA). You can actually buy and sell them as you would any equity stock. If you think about it, most mutual funds actually underperform the S&P 500, and charge you annual fees to do so. If you were to buy the SPY, then you make money if the market goes up, but don't lose money (very minimal fees to keep the fund balanced) when the market is flat.
Good news for online traders. As of August 13, 2001, the REDI ECN is listing the SPY, DIA, and even the QQQs for trading. This will add to the liquidity of the funds, and make for even more efficient pricing (they are already trading very well). 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 October 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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