Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
MARKET ORDERS
I rarely trade listed issues. But I feel that exposure to this marketplace would be advantageous to my trading over the long term. Perhaps you could shed some light on just how the system works. I know the uptick rules - it is the mystery of the book and its depth that confound me, I think. I used limit orders the last time I tried to short a listed issue (AXP). It was suggested to me then that market orders were the way to go when going short. Any insights would be appreciated - Greg
Since the New York Stock Exchange (NYSE) has rules to follow, it is imperative that traders know and understand those rules. You will always get proper executions on the NYSE (as has been our experience over the last couple of decades), but you should never turn your "hand" over to another, even the specialist. Never use market orders. We teach that as our "prime directive," and when you fully understand how the system works, you will know why. We rarely enter short sales but do rely on derivatives when going short.
Think of it this way: you never want to trade passively - that is, have someone buy from you or sell to you - you want to initiate all of your trades (hitting bids, taking offers), thus allowing you the luxury of going with the momentum rather than against it.
Don't be too concerned with the depth of the book on the NYSE. Rarely do we see more than 25 cents' movement without 10,000 or more shares. If you're going to enter short sales, go ahead and put in a limit price below the bid (or at the bid). I do this when entering pairs trades (doing the "hard side" first). You will find that very often the specialist will go ahead and print a few shares a penny lower (thank goodness for decimals!), and then take out your short sale. This will at least limit your potential for manipulation losses.
As far as how the system works during the trading day (different rules apply for opening and closing trades), it is based on the simple uptick trade rule (as opposed to the uptick bid rule used on the over-the-counter (OTC) markets.
TAPE READING
Could you explain why tape reading is much more important for NYSE trading than Nasdaq? Is it a bad idea to trade NYSE without tape reading (charts and so on)? - Thomas
Tape reading is crucial to NYSE trading, and probably the single most important skill for a successful trader. Reading the tape on the Nasdaq is not really possible, since there is not a single auction marketplace where all the trades are taking place. Now, before I get letters talking about the ECN access to NYSE stocks, let me explain: When we put up a dedicated ticker for a specific stock, we can choose to filter for NYSE only, regionals, ECNs, or everything (based on the size of the trade and so on), which allows us the ability to determine such things as institutional activity, short selling by firms, or even individual interest that day. These factors are significant when trading for a living. We can look for trade-throughs, matching trades, and crossed markets, among other things, when properly trained and experienced.
We rely on charts for premium/discount of the overall marketplace and for the standard support/resistance/pivot points and the rest of the TA factors, which apply to all markets traded, NYSE, or OTC. I hope this helps.
SIPC INSURANCE
I have had an account with a well-known, national brokerage firm for about 15 years. I am considering opening an additional account with a direct-access broker. I am aware of the information available at the NASD site, but would like to know more about the financial soundness of these companies and the companies they use to clear their trades. Also, many of these firms advertise that they have SIPC insurance and additonal insurance. Information on the SIPC site seemed very abbreviated. Can you shed some light on when SIPC insurance is applicable and any information on the insurance carriers? In general, are they reliable, and is the additional insurance comparable to SIPC insurance? Or is this just an advertising ploy? - Name Withheld
Good questions. I feel strongly that every business person should do their research with due diligence prior to putting their name or their money with anyone. Securities Investors Protection Corp. (SIPC) insures retail customers of brokerage firm's accounts. If you are going to be investing or trading with a retail firm, make sure the firm is SIPC-protected. In the documents that are signed by customers you should find (in the small print) which exchange that the firm is a member of (NYSE, American Stock Exchange, and so forth), or if it's a member of the NASD (National Association of Securities Dealers). There is a distinction; the NASD is not an exchange, but is composed of broker-dealer members who transact business for themselves and for their customers. Many trading firms choose which they want to be a member of based on their business model.
The direct-access brokers are pretty much covered by the same rules as other brokers, and should be SIPC-protected as well. Proprietary firms (like Bright Trading) are composed of members, not customers, and are of course in a different category. I hope this helps.
BOUNCING TERMS
Have you ever heard of "bouncing stocks"? If you have, can you explain how and if they work? Thanks - Joe Gaspar
Not as a specific term. Stocks do tend to "bounce" off of
"lows" (support). Stocks have "dead-cat bounces" -
but I have not heard the term "bouncing stocks."
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."
Originally published in the May 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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