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 |
BID/ASK EQUATIONS
Is there a mathematical equation to figure out the bid/ask price? How do computers handle that information?
There is not really any mathematical equation, although there are automated systems. On listed stocks, there is a single place (where the specialist is) that handles all the orders. If they have buyers at 30.10 and sellers at 30.20, then you will see either those prices or slightly better placed by the specialist. On-the-counter (OTC) pricing is usually a bit more fragmented, but can be wider or narrower, depending upon how many people are participating. With either market, the supply and demand usually determines pricing.
PAIRS TRADING
I saw you and your group from PairCo speak at a recent trading expo, and am intrigued about the idea of this apparently low-risk approach to the market. You briefly discussed the correlation between two stocks. How do you go about determining a good correlation? Simply by current price movement?--Jesse
Thanks for visiting us at the New York expo. We do a couple of things when researching a pair of stocks for trading. We start with a simple review of a price chart going back 30 days, 90 days, one year, and yes, five and 10 years. We then break down the pricing difference based on the capitalization of each company. Obviously, simple price difference wouldn't mean very much if one stock had a billion more shares outstanding. We look to see at what price levels the two stocks would actually meet or reverse (one going from higher to lower overall price). We then prepare a fundamental analysis review of each stock to see which one seems to be stronger currently. We review the technical charts to see if any patterns are apparent. After all this, it gets pretty complicated.
The most important thing to remember when trading pairs is that you are making your money by going in and out multiple times, capturing many small profits and, of course, knowing when to simply close out and start over. Check www.pairtrader.com for more info.
COMMODITIES, EQUITIES, & EDGE
I have a number of questions. First of all, is Bright Trading involved in commodity trading, or are you strictly an equity trading shop?
Next, on looking at your website I did not read anything about any edge you may have. In my career, I have never considered a front end to be much of an edge in today's technologically advanced world.
Third, I look at candles with the commodity channel index (CCI), and sometimes go for days without seeing a decent risk-reward daily pattern. When trading equities, is there a risk-reward profile your company suggests?
Fourth, I've read that most of the equity daytraders are looking for order flow from large institutions and are getting in front of this flow directionally for a few ticks. Is this your strategy? --Mark
To answer your questions in order, we trade primarily listed equities; that's how we find our best edge.
Front ends have little, if anything to do with an edge, but that's just a matter of fact. It takes $1-3 million (or more) to implement opening-only strategies based on fair value calculations, correlated pairs trading, mergers & arbitrage, and outside enveloping when trading on the same side as the New York Stock Exchange (NYSE) specialist (as opposed to trying to beat the market). We provide the capital to implement these and many other capital-intensive strategies. All the chart patterns in the world aren't going to help you become a successful trader. However, charts are helpful in research, and intraday tick charts are a must for tape reading. CCI is fine for investors.
Finally, order flow is how order takers try to make money for some institutions and market-making firms, not professional discretionary traders. These jobs are obviously drying up due to technology advances. You might want to check up my STOCKS & COMMODITIES article from January 2003, "Survival Of The Fittest."
Anyway, the NYSE specialists have been making money for 200 years. Why not learn how to capture their edge?
UNFILLED SHORT ORDERS
I had a short not get filled this morning and I was wondering if I have any recourse. I shorted 500 PX limit 47.75, and my order went in at 9:37:34. It closed yesterday at 47.75 and the specialist printed 17,800 at 47.76 on the open. I did not get filled. I called my broker and the best they could get out of the specialist was "orders ahead." This is not the first time this has happened with this broker. I could understand if this was a large order, but 500 shares? Come on! What do you think? Anything else I can do about this?
Sell short orders are the last in line, and since 0.76 was the only
uptick, it wouldn't have mattered what price you entered if there were
long sales or earlier orders placed. It happens to the best of us...
sorry.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the May 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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