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. To submit a question, post your question on our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. | 
Don Bright of Bright Trading |
FILLING ORDERS
I have found your Q&A column to be the most helpful feature of STOCKS & COMMODITIES since I subscribed, and I look forward to it every month. Hopefully with your experience and knowledge you will be able to answer my question.
I placed a short sale order of 400 shares of HDI five minutes into the open (9:35:33) on October 3, 2002, with my Internet broker. It was a limit order at 47.63. At 9:36:05 the bid-ask was 47.50/47.71, last trade at 47.61. Shouldn't my short order of 47.63 show up? (I use eSignal and refer to time and sales data.)
At 9:36:14, trades went off at 47.69 (two lots on the NYSE - 1700 and 400). Shouldn't my order have been done first? Then at 9:36:28, 500 shares traded at 47.60 - which should allow my short order of 47.63 to be listed, assuming it was not done yet (the uptick rule), but the ask continued to be reported as 47.69. What gives?
Since this is not the first time this has happened and I have gotten every possible false response in the past (people have suggested these were stale quotes or that there were orders in front of mine - neither of which holds any weight), would using direct access prevent this?
Since you have mentioned numerous times that you like trading the NYSE open, what do you recommend as a way of accessing the NYSE with minimal cost? I heard that super-DOT might be an option. Are electronic communications networks (ECNs) an option with NYSE issues? Am I just realizing now the negative aspects of using an Internet broker that professional traders already know? Your sage advice is appreciated - Dennis
First, short-sale orders are not always reflected by the specialist. In fact, the NYSE open book states that they do not reflect short sales at all. In most cases, it is not a big deal, since you will likely get price improvement by selling at a higher price, and if you don't, there is a good chance the stock will not trade exactly at your limit anyway. Then there is the question of timing. As professional traders, we allow a two-minute "fudge factor" before investigating any apparent trade we feel entitled to. This allows for clock differences, the mechanics of "matching" orders, and the like. Another thing to remember is size priority - wherein a larger order may take precedence. In any case, if your order is valid for two minutes, you should never be "traded through" (traded at a higher price than your limit).
The concern over the 47.69 last sale versus the sale at 47.60 may have been on an ECN or part of the consolidated tape (versus NYSE only). Again, the short sales are often not reflected. The rule of thumb is that if your order is live for over two minutes, they need to either fill or quote it (except for short sales).
This may help ease your mind a bit: Right after the opening is a very busy time for the specialists in New York. A few seconds one way or the other may seem like a lifetime when you are hoping to get an order filled, but for the most part these people do a great job. My opening-only strategy (outlined in prior issues) allows for placing orders prior to the actual opening of the markets, thus giving me proper pricing based on the initial first print of the day. Getting out or closing these trades takes place in the next few minutes, and I am subject to the same timing issues mentioned above. Timing on an ECN is immediate, but then again, there is no single marketplace for order distribution (which is a big edge, and makes for easier tape-reading). Your last observation is valid; there are major differences between the way we can handle DOT trades, ECN trades, and NYSE orders versus retail customers.
Most brokerage firms do a good job for the investor, but few can handle the needs of the professional trader. One major drawback is the order routing necessary for customers (routing through the brokerage before going to the trading floor to verify account size and accuracy of the order, and so on) and the handling of the order flow.
Feel free to send in other examples, and I'll do my best to help. Remember, getting price improvement generally outweighs missing that rare trade.
TAPE-READING
In your October 2002 column, the first letter, second paragraph, says: "Next, I saw a short-seller (150,000) stepping down. I was about to bid outÉ"
The letter and your answer say nothing about the trader's software, feeds, and so forth. And your answer says nothing to indicate that the trader misinterpreted whatever it was he saw. So how was this trader able to tell? I'm trying to figure a way to recognize short sales when I'm looking at end-of-day time and sales. (Of course, it would be even more useful to know what to look for in Level I or II, and so on.) Thanks - Nusrat
We teach tape-reading, and use the "following a short-seller" view as one of the primary focal points. Whenever you see a larger offer coming down in price to reflect a legal uptick, you can assume that this order is marked short (as opposed to long stock). The assumption is that if they could hit bids they would, but since they cannot, they "follow down" the last sale price (plus a penny or so). For example: for last sale 34.05 they offer 34.06 (short); for last sale 34.00 they offer at 34.01 (short); and so on. This happens virtually daily on listed stocks. Seeing this happen can be a tremendous edge to professional traders.
Originally published in the May 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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