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 |
PENNY ENVELOPE
When enveloping intraday using the New York open book, would it make sense to place a bid (say, 200 shares) a penny above a really big bidder (20,000-plus shares) and offer a penny or so below a really big offer, in hopes of getting price improvement when (and if) the specialist cleans up those big blocks? Aren't the bigger blocks likely to be completed as negotiated trades (and therefore offer the opportunity for price improvement)? Is this a good way to place envelopes? Thanks. -- Guy Truicko
Since the price generally "goes to size," you can envelop as you say, but do not trade momentum that way (from one side only). Often when a stock trades a number of times at a penny or two above a big bid, or below a big offer, the larger order is taken, and others scramble to cover their positions. For example, when the stock trades at the point, the short sellers from a penny or two below will rush to cover their positions. This is okay for enveloping, but not a good idea for momentum trading.
MARKET VS. LIMIT ORDERS
My brokerage firm charges much less for market orders than limit orders, and yet I have heard you say that traders should use limit orders. Can you tell me the reasoning behind each type of order? Do you ever use market orders?
It's the age-old question, market versus limit orders. For most market participants, brokerage firms prefer that their customers use market orders for a couple of reasons. For one thing, they cannot be "held" to specific pricing, and this also allows for more leeway in their reporting commitments. Second, most retail brokers are allowed to trade against their customers' orders or to sell orders to a third party. Both of these practices allow for a more lenient pricing structure to their customers.
When you are trading for a living, every penny counts. It makes no sense to save $20 on commission but lose $200 on a 2,000-share trade. When trading listed securities especially, the limit order is the preferred designation. Limit orders can be executed more quickly than market orders (the NYSE specialist must determine prices for market orders, but the assistant or the market itself can determine limit prices). If you try to pay 30.40 for a stock, but the offer (and legitimate price) is 30.35, you will likely be given price improvement through the system. When placing a market order, you may be filled a few seconds later, and at a different price.
I strongly suggest that you determine how your brokerage firm handles both types of orders, and ask questions whether your orders are subject to "in-house" trading or the "selling of order flow." Find out if your broker, not the NYSE, may be responsible for giving you pricing on a market order.
I personally do not use market orders except at the last second of any day when I feel the need to close a position before the bell rings.
SPECIALISTS AND CLERKS
Would you elaborate on what a clerk does? When I visited the floor recently, I spoke to a specialist for about 20 minutes. The clerk was in the background, his hands flying. I was watching the book on the flat panel. The trades moved up and down the book to accommodate all the bids and offers I saw within the levels displayed on the screen, and I saw the P&L go up steadily.
I know the specialist was not doing any trading. I also saw the clerk eventually come over and report to the specialist what he had done. I do not know exactly what the clerk did, but he must have been filling orders, and somehow, some way, made the P&L for the day move up - whether the price went up or down. -- Jem
Great question, and boy, are these guys good! They have the responsibility for the proper trading of "immediately executable" orders and for adjusting quotes to reflect "live" bids and offers. When they have an order to sell 1,000 shares at $42.10, and a buy order comes in to pay $42.15, they simply click the "complete order" key and execute the trade at the best price ($42.10 in this case).
The clerks are also responsible for keeping the specialist apprised of market orders and shares needed for proper execution of these orders. For example, they might ask the specialist: "We have 2,400 shares excess to buy at market. Where do you want print it?" The specialist would ask, "What is my net position now?" The clerk would tell him, and then the specialist would provide the liquidity needed to fill these orders.
You probably saw all this happen, but you may not have been aware of exactly what was going on. The specialists and clerks have ways of communicating almost nonverbally; there is a minimum of discussion. Each post has up to 20 stocks that they are responsible for, so these guys are pretty busy.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the July 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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