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 |
"OVERHEARD" CONVERSATION ONLINE
NASDAQ and the DJIA keeps going up. As of today, the DJIA's another 16 points up and it's only 9:30 am Pacific time -- it's like it's 1999 all over again! We have to have faith in the Federal Reserve and in the US. If you short-sell, you lose most of the time. -stock_trad3r
I don't really think short-sellers are "anti-American"! Just for the record, how much are those indicators up this year? As traders, we really can't afford to be "buy-only" types -- and certainly not "buy & hold" types. Since the market guarantees it will go up and down, why take away half the opportunities? And if it weren't for short-sellers, where would all the "buy & holders" get the stock?
"OVERHEARD" REJOINDER
The DJIA and the NASDAQ are down this year, but that doesn't matter so much. The future is what matters. Once 2300 is retouched, a solid cup & handle will have formed and the next target could be 2500. The NASDAQ was down a lot in October 2002, and then it proceeded to nearly double the following year.
Short-selling is okay, but you must know when to cover because you can lose money quickly when things turn around. And the turnaround can be sudden. NASDAQ added a staggering 110 points in just four days. -stock_trad3r
Just a couple comments. You said "The NASDAQ was down a lot in October 2002, and then it proceeded to nearly double the following year." Yes, but it still hasn't gotten even close to its highs of 5000. When something goes down 78%, it has to go up 350% just to get back to where it was: 5000 high, down to around 1100 (it was 1114 as of October 9, 2002). Currently, it's at 2162. I doubt we will see 5000 NASDAQ in my lifetime, but I've been wrong before.
I say the same things to the bulls as the bears: "Trade 'em, don't marry 'em" -- being opinionated is one of the reasons that traders fail. Stocks can go down more quickly than they rise; traders prefer to collect money (or lock in profits) than spend it. If the market is falling, why bother to "catch the falling safe"? We hear about the long haul, but timing is important. How long a haul will it be for those who bought the NASDAQ near 5000?
Don't forget, when someone says there's been an 8% average annual return for the DJIA since the early 1900s, that's confusing, because you couldn't buy the Dow back then; you had to buy all 30 stocks, and you would have gone broke with 29 of them. I think General Electric is the only original Dow component (maybe a merger or something, but not original companies). Finally, don't fall for a sales pitch from a broker who may make you "broker."
HYBRID TRADING SYSTEM
I've been reading about the hybrid trading system on the NYSE. Is tape reading going to change? Will your traders be doing things differently? -Hydroman
Good questions, and by the time you read this, a big portion of the rule changes will have taken effect. Let me start with a major change I personally am not a fan of, the practice referred to as "walking the book." In my opinion, this will diminish the liquidity offered on the NYSE. For the last few decades, traders were given "price improvement" on their limit orders often during the day. A example is this: If the NBBO (National Best Bid or Offer) reflects $47.10 bid, $47.14 offer, our traders would enter a $47.05 bid and perhaps a $47.17 offer, and keep moving their bids and offers away from the NBBO. When large orders come in, the specialist would accommodate them with a single trade at a higher or lower price. A buyer of 50,000 shares would pay $47.25 for the entire amount of shares, and anyone willing to provide liquidity (by having their orders already in the book) would be given the better price. Our trader would have sold (short) the stock at $47.25. The additional benefit was that we were more often than not trading "with" the specialist, since he generally "accommodated" large orders by (in this case) selling along with the other orders in his book. The NYSE advises me that in this example, the liquidity refreshment point could kick in, giving us price improvement. For more information, go to NYSE.com and click on the hybrid link.
For the most part, our traders won't be leaving any orders on the NYSE because of the new "walking the book" rule. The 50,000-share buyer might do this: Buy 1,000 for 47.14, another 1,000 at 47.15, perhaps another 5,000 at 47.17 (partly from us in this example), then buy more stock at $47.20, 47.30 or even $47.50 -- at each price level. This would take away any incentive for our traders to provide this liquidity, and cause a worsening of price levels. I am advising our traders to go elsewhere with marketable limit orders. Since some ECNs pay for providing liquidity, it only makes sense to send our orders to one of them.
That said, when one door closes, another opens. Some of my people are already writing (or modifying) their programs to enter trades only when a certain price change takes effect. This would put them into trades at the ends of more volatile price moves. The other benefit would be to our pairs traders (see pairtrader.com), who focus more on predetermined price level entries as opposed to obtaining price improvement when providing liquidity.
As I wrote in "Survival Of The Fittest" (S&C, January 2003), we will continue to modify our strategies as the market evolves. I hope to put together a detailed analysis of the NYSE changes after we have trading time behind us.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the November 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine.
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