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. | 
Don Bright of Bright Trading |
TICKER
While watching the ticker on Cnbc preopening, I note most trades are in the hundreds of shares. After the opening, I note the trades are predominantly in the tens of thousands per trade. Then, when I access a Level II time and sales ticker, even after opening, I note, once again, predominantly trades in the hundreds of shares with no sign of the big trades. If I am looking at Level II and see a market maker showing 100s at $20.05 (for example), what is the impact of all of those big shares that are not showing up on my trading screen? Does it have no effect at all on the bid/ask? Would that volume not move the stock price, even if no low-volume trades are currently showing up on my screen?
James Kellndorfer addressed this same question in the October issue of Technical Analysis of Stocks & Commodities, and he seems to have no answer either. In view of the facts shown in Kellndorfer's article pertaining to the increase in program trading with a simultaneous decrease in small trading activity, has this caused your traders to seek faster trades while accepting smaller gains in order to remain in the trading business? Thanks -- Ponsinir
There are simple answers to your questions. Before the opening bell, you may see some trading in the premarket hours. Big players don't bother much with pre- or post-market hours trading. The reason for the large trades right after the opening bell is also simple. During the night, large institutions and traders place opening-only orders, either at-the-market or with price limits. The specialist matches up all these orders and determines a fair opening price of tens or hundreds of thousands of shares. Many traders are taught to fade the opening and place opening-only orders, only to close the trade during the first few minutes of trading. This partially explains your first question.
Now, when you look at Level II, you are seeing simple Nbbos (national best bid/offers) from Level I, along with the various electronic communications networks (ECNS) and perhaps the regional exchanges. Most Ecn trading tends to be smaller retail traders, so therefore you see more frequency but smaller share lots. If you subscribe to the New York open book, then you will see the larger institutional orders. As an example, I'm looking at Time Warner right now. The Level II montage shows a Nyse bid size of 5900, ArcaEx with 100, Inet with 100, Nasdaq with 100, and so on. The Nyob shows 6,000 (16.38), 14,300 (16.37), 11,500 (16.36), and so on. These are real orders that do not show up on Level II. Level II has lost much of its significance since they started giving it out free to retail traders about 10 years ago.
As far as impact on pricing goes, we look at the Nyob for target prices (large orders) and depth of book. We also look for "air pockets" where there may be a nickel or a dime between large orders. This is all a part of effective tape-reading.
Now let's look at the Nyse definition of program trading, and try to explain how the volume/pricing affects the markets:
Program trading encompasses a wide range of portfolio-trading strategies involving the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more. Program trading is calculated as the sum of the shares bought, sold, and sold short in program trades. The total of these shares is divided by total reported volume.
This is not the only way to measure program trading. Three alternatives for October 18-22 would be to:
a) Examine buy programs as a percentage of total purchases (25.7%);
b) Examine sell programs as a percentage of total sales (25.6%);
c) Examine program purchases and sales as a percentage of total purchases and sales (25.7%).
--from NYSE.com
Now, as far as adapting to the marketplace goes, our traders employ several strategies, including program trading. Program trading is a methodology, not a menace. There are so many strategies that involve the use of automation that it's possible for both sides of a single trade to make money overall that day. Some use option strategies, some use the futures, some utilize correlated pairs trading strategies (www.pairtrader.com), and some simply learn how their core stocks trade and trade off of relative strength. With lower volatilities, we can make the same kind of money, with lower risk, by simply increasing our share size. Increasing share size per trade can actually lower your overall trading costs, which is another benefit.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the February 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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