Q&A
Since You Asked
| 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 |
OPENING-ONLY ORDERS
I've been following the opening-only orders strategy very closely, and I have a question. I'm a futures trader and somewhat unfamiliar with the practical aspects of trading listed. I watched around 13 opens this morning, and saw fills on three of them. One was LLY, which opened delayedÉ with news. The position would have been long in LLY at 56.50 to open. After a nice move to 56.80, I saw futures leveling off, possibly getting ready for more buying. But let's say a trader wanted to start unwinding a 2,000-share position at this point.
Since the open, the quotes have not shown more than 300 on either the bid or the ask. I'm trying to read the tape and see what it's doing. All the other drug stocks are down off the open; one is starting to roll over. I'm looking to exit. Now what? How do you unwind a 2,000-share position with only 200 showing on the bid in a case like this? Do you take it off in pieces, or put the whole thing out there? Thanks for any ideas or suggestions - Dave N.
If you check the time and sales, you'll see that 100,000 shares or more of LLY traded at that level. All the stocks we trade are high-volume, large-cap stocks, so we never worry about 2,000 shares. That is a good number of shares to trade, since it comes in "under the radar" for the most part.
I adjusted my LLY buy price to reflect the preopening indication that was disseminated by the specialist (so I missed it by 5 cents); my brother got in (at 56.50) and actually sold his at 56.80.
Following the tape is more important than the quote, since you will see the number of shares traded at each level. The quotes can sometimes be deceptive since the inception of NX order capability on the NYSE.
OPENING-ONLY ORDERS FOLLOW-UP
Thanks, Don! Yes, that does help. So I guess the specialist doesn't want the NX to be active, so he's only showing 100 on each side. Or he'll give a couple of hundred shares to NX by showing 300. Is that right?
I went back and looked at the tape; I see what you mean! There was even a 20,300 print. I see three successive prints of 2,500 at 9:46, 56.80. I suppose that's probably an opening-order trader's exit.
So when I'm trying to get my 2,000 shares done, what's the right thing to do? I know you've stated before that you'd rather not have the market come to you, so is it right to put a 2,000-limit order on that bid of 100 shares, or 0.05, 0.08 below? I'm pretty sure you won't advocate a 2,000-share market order here! - Dave N.
The tactical aspect of exit trades is generally the same for all orders. We rarely use market orders (since only the specialist can match these orders at certain prices, which may cause a time delay), so entering a sell order at a price below the bid, or a buy order above the offer, is the way to go. You will most likely get price improvement to the best price at that second.
MORE OPENING-ONLY
Would the opening-only strategy work at other times of the day? - John Q
At other times of the day, we call a portion of this strategy "enveloping" (having simultaneous buy and sell orders away from the last sale price). We do this to take advantage of the many trade-throughs that happen on the New York Stock Exchange (NYSE) every day.
The opening-only order is even better, because we are assured of being on the same side of the trade as the specialist (since they can only accommodate imbalances).
ENVELOPING
Can you share more on enveloping? I still struggle with it. I get some 10-cent winners, but that one big loser that you can't get out of takes it all back. For example, yesterday I was enveloping S at around 3:12. I got hit at 25.50, but it was just the beginning of the tank. Before I could get out, it was 25.20. How can you get the ones you want to be hit on, and yet avoid the big loser that is tanking for good reason while enveloping? - vhehn
Enveloping requires constant work. We cancel when the bid/offer creeps to the price we have entered, and try to only get hit when there is a bigger drop or rise from the prior bid offer (trying for 10-25 cents).
For example, on Tuesday I entered about 285 orders, and was only filled on about 80 or so. I would buy at say xx.20, and then bid xx.10 and offer at xx.32. If the bid on the stock came down to xx.12, I would "update" the xx.10 to xx.05 or so. By keeping this up, and never adding more than a couple of times in the same direction, we can do well during those days (too many days sometimes) of troughing up and down in a certain range.
The same rules apply to individual stocks. We monitor relative strength, momentum, sector, and so on. If you're doing this manually, it is a bit intense to do it on more than one or two stocks at a time. If you automate, you can monitor more stocks easily. I suggest you achieve a high success rate manually before attempting automation, however.
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Originally published in the April 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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