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 |
BASIC SKILLS FOR DAYTRADERS
Don, since you think (pure) daytrading is a limited style, then how do other daytraders make profits? Could you tell me some basic trading methods or skills for daytraders? -- Anonymous
I'm not against daytrading, but I think other strategies can augment your income. Our new people learn how to do "open-only orders" (OPG) on the NYSE. We enter about 50 stocks, buys, and sell shorts, based on fair value calculations. Then, when a few of the stocks gap up or down, they are filled only when the specialist is filled. Why not trade on the same side as the guy who's been making money for 200 years? Our daytraders always have "outside envelopes," the practice of having active bids a few pennies lower than the quoted national best bid or offer (NBBO) bid and active offers a few pennies above the sell NBBO, to take advantage of sweeps, either collecting for providing liquidity via Arca, or joining the specialist again on hybrid overrides (exemptions and exceptions to the Nms rules).
We do a lot of "crutch" pairs trading, where we lean on a big offer in stock A while shorting stock B when the market is showing a negative premium to S&P fair value, buying back the short if it goes our way or buying stock A at a predetermined price within our buy zone.
FILLS AND LIMIT ORDERS
What conditions are present where your limit orders are filled more often? Thanks. -- ProgrammerGuy
Limit orders are just that, an order to buy or sell with a specific price attached. When we start to see a big move and "must have" the stock, we enter bids higher than the NYSE offer, knowing that we will likely get the offer price anyway but never anything higher than our bid price.
If you're referring to making money on the bid/ask spread, you might rethink that -- it's not going to work in your favor. You might very well buy on the bid, but then the bid may go down a dime, and take the offer with it. Even market makers rarely get filled on both sides of the bid/ask spread.
HEDGING VS DIRECTIONAL TRADING
In holding an overnight position (with your firm), does it always need to be hedged? Or can the trader have the option of holding, let's say, five stocks at 1,000 shares each -- low beta, diversified for a directional play, each stock in a different sector, regardless long/short, just a direction per se -- with risk parameters that make sense for a swing trade that is within the buying power allowed for overnights? If a trader can trade freely using common sense with good risk control, do all overnights need to be hedged, regardless of the variables? I am just trying to determine how much flexibility you offer to your traders on overnights. Thanks. -- Mitch from NJ
We have some strictly "directional" types, and they can take home positions (in general with not so good results overall), but sure. Those that are hedged seem to do better overall.
This is why clearing firms and trading firms have haircut charges (haircut = risk fee for extra capital usage). For example, hedged positions are six times equity for free. Unhedged positions have a higher cost of carry.
TRADING VS INVESTING
Thanks for your response; it's good to see there is some freedom in trading different styles using good risk parameters from your experience. So why are there not many good directional traders in your firm? Do most traders lack the knowledge in understanding the markets and stocks they trade? A stock is going up or down, choosing a direction and being profitable is not brain surgery, it's how you manage your trades with every other style that determines your profit & loss. Your thoughts? -- Mitch from NJ
In my opinion, there is a big difference between trading and investing.
If you're switching money from bank interest straight to investing, trying to beat bank interest, that's one thing. If you need to borrow capital to invest with, then you have to overcome that percentage before being profitable.
Investors look for return on investment (ROI) -- mostly passive income, where traders are actively working at their trading. Sure, there is crossover.
A trader with $25,000 who makes $5,000 per week -- is he really making 20% per week in ROI? Of course not, he's working really hard each day, and the money being used -- ours -- is just a tool, no different than a computer.
When you find a stock that you want to keep long for days/weeks/months based on fundamentals and technicals, you can probably find an offsetting position to sell short (collecting interest on the short-stock sales, which is not paid to retail traders, but our people currently receive 5% per annum) -- thus, you're paying considerably less to keep the long position. Does that make sense? If you pay 6.75% naked to use money, plus some possible haircut, why not collect 5% interest and get to use more money without a haircut?
As a family portfolio "hedge fund," we are almost always hedged against general market risk, and yet we don't have to use other people's money or borrow any -- so at times we take a shot. But in general, we're pretty hedged.
Hope that helps.
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Originally published in the November 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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