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 |
BASING MY TRADES
I don't know what to base my trades off since there is no specialist to follow. Are there guys still making money based on specialist prints?
You need a nimble program that looks for five-cent moves in a stock and then hits it on a sweep, or have trigger points already entered to take advantage of a sweep. Working pretty well, according to my guys.
SCALING OUT
Do your traders "scale out" of positions, or do they close all at once? Does it depend on their strategy or technique?--Trader92
Some do and some don't, depending on the individual situation, and, as you pointed out, it varies depending on strategy. I do my "opening only" strategy with two layers entered, one for 2,000 shares and another (wider envelope) for 1,000 shares. When I get filled, my automated program sends in a retracement order (for profits) for half of my position in each stock. I then prefer to tape-read and get out of the balance manually, thus "scaling out."
Many traders get into something they don't feel comfortable with, then tend to get out of a portion early. Perhaps it would be better to go in with a more comfortable share size.
However, don't forget the psychological factor of "covering" or "closing half" of a position. When traders are in a bad position, many are "sure" that if they cover, the stock will reverse (not a good mindset, not matter what). If they sell half, they're happy (or happier, at least) that they did so if it goes against them further. If it does turn around, they're happy(ier) they still have half the position. Both result in a better state of mind, and this can lead to getting into better trades. "Whenever unsure, cover half" has helped a lot of traders overcome their mental roadblocks.
ON THE NYSE HYBRID SYSTEM
I had an order to sell 200 shares at 40.26. I got filled and noticed the bid offer really didn't change. Why? Did someone just sweep through the open book and the offer wasn't reflected?--narballs
This seems to be an unforeseen benefit to the hybrid system, and my traders are loving it. The automated scalpers and the pairs guys both are getting some good pricing. On our RediPlus platforms, we see our quote line change color and see a "print" down or up several cents, filling our "outside envelope" bid or offer without even changing the Level I bid/offer.
For example, just the other day one of my stocks was showing xx.10 bid and xx.12 offer, and I was a xx.01 bid with my outside envelope. One second I was filled at xx.01, and immediately hit the xx.10 bid for a quick scalp (scalping is normally not my style but I figured, what the heck? It was a free couple of hundred bucks).
TRADING ON MARGIN
I have never traded on margin because of the risk and just not liking taking a loan. Now I'm thinking about taking small trades on margin. Say I take a small daytrade on margin -- let's say a 100-share, $20 trade. So I take a $2,000 trade on margin, hold it to around close, and sell it for a small profit. How would my interest be compiled for those few hours?
A couple of things to keep in mind. The average return on interest is between 8%-12% per year for the normal investor/trader, so to borrow money at 10% makes little sense (yes, there are always exceptions, but very few in this case). Be very careful of the spread between what they charge you and what they pay you for your cash.
Another concern with retail brokers is that they don't pay (most) investors interest on their short-stock sales, which makes it virtually impossible to engage in profitable hedging strategies, like pairs trading and mergers. A differential is one thing, but keeping 100% seems a bit much to me. But this whole "making money on the money" is something we've been preaching to investors for years -- and it is obviously where most of the retail brokers' money is being made. This makes it so they can let you trade commission-free.
I've never traded in a retail account and have to rely on others for all the details. So basically you're saying you have a line of credit available (which is all margin is, anyway) and you pay 10.25% when you use it, even though it's secured by the underlying stock shares -- is that correct? They can sell you out and recover the margin call anyway, which still seems like a rough deal. I'll bet you're not even receiving 4% on your long stock.
For comparison, our differential is only 1.75% between what we pay and what we charge, and traders receive a full 5% on their short-stock sales. When you're long $1 million and short $1.2 million, for example, you don't end up paying a gigantic amount in interest because of the 5% payment. For most retail accounts, the lack of short-stock interest is cost-prohibitive for many long/short hedging strategies.
Check around for the best deal; commission rates aren't the only consideration.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the May 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
Return to May 2007 Contents