Q&A
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. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
THE OPENING PLAY
I was wondering if you could help with a couple of things. You have written about your opening play a couple of times. Now that we seem to have 24-hour trading, with electronic communications networks (ECNs) and so on, is that play still working? Are there any major changes you can address that I may not know about? In addition, if you have time and space, could you please explain again how you see the end-of-day shares that are being bought or sold ahead of time? How can I get this information? Is this a special privilege? Is it something that has to be paid for? Thank you. — eqtyguy2008
Okay, good questions, and good time to review. Historically, the first hour and last hour have been the better times to trade, and this applies even more these days. Intraday, my traders are more focused on their “precalculated” numbers involved in correlated pairs and mergers. So there’s still some daytrading going on, but it’s more short term over a few days on multiple positions.
Since it’s been a while since I’ve discussed this, let’s review the openings again. You can search back issues of Stocks & Commodities for previous discussions on the subject as well, since I’ve written about this in the past. In a nutshell, we hope to find stocks that are opening up or down more than the overall market — extreme moves, if you will.
There are buy and sell orders submitted all during the night to the NYSE. The NYSE specialist matches these buy & sell orders and comes up with a share imbalance, either more to buy or more to sell. Basically, he is mandated to help accommodate these orders, so he or she is selling when more people are buying and vice versa. We like to be on the same side as the specialist; why not? They’ve been making money at this for decades.
We place buys and sells lower and higher than we would expect the stock to open at, based on where the futures are trading. If futures are up half of 1%, then we may offer stock that is up three-quarters of 1%; same goes for excesses on the downside. If the stock opens way up or way down, we participate “with” the NYSE specialist. That’s a good place to start.
We place buys and sells lower and higher than we would expect the stock to open at, based on where the futures are trading.Now to your concern about the 24-hour trading. Yes, we certainly look to where the ECNs are trading the shares. We get an idea of where we want to place our bids and offers. Remember, though, we are looking for an anomaly and generally place orders above or below a few cents. The extra information can be helpful, of course; it’s a good read on the market.
Now to the end-of-day (EOD) information. It’s similar to the overnight action, in that market-on-close orders (MOCs) are placed all during the day. This is done for a couple of reasons having to do with fund managers, especially mutual funds. Again, the specialists take all the buy orders and sell orders marked “MOC” and match them up. They determine the excess buys or sells and publish what is referred to as “MOC imbalances.” I should remind you that these orders are “market” orders with no limit price. The order placers are hoping to get the last trade of the day, which may vary from the 4:00 pm official closing time.
This imbalance is published 15 minutes before EOD. We get this number on our RediPlus (Goldman Sachs) platform, but as mentioned in previous columns, you can also see this on news sources such as Reuters or Dow Jones.
We don’t pay extra for this information, but some services may charge you. We like to see this information, as it gives us an idea of how the market will close. I use the Dow Jones 30 stocks as a barometer to see the sentiment based on how many buy imbalances there are vs. sell imbalances. Watch this for a while, and you’ll see what I mean.
Don’t get fooled, however. If the market is already up 150 points, and you see, for example, a positive imbalance in GE, don’t count on an additional runup. Common sense must always prevail.
Hope this helps.
ERRATUM
In my January 2012 S&C column, I erroneously put a potential transaction tax number at 3/10 of 1% instead of 3/100 of 1%, a big difference. My apologies.