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.
DETERMINING LARGER NUMBERS
Maybe you can help me understand something about share volumes. I hear the volume levels are around three to four billion shares on a daily basis. How is this calculated? Do they count a buy and a sell as two separate transactions? The New York Stock Exchange only trades about a half billion, according to my platform. How do they determine these larger numbers? I can understand adding NASDAQ, but is there a way to show the total shares each day? — techtrdr39
Good question, and I had to check a couple of sources to get a reasonable response. First off, a buy and a sell make a single transaction. Historically, the NASDAQ used each side as a trade, but it hasn’t for a long time. You can start by going to www.nyxdata.com/Data-Products/National-Market-VolumeSummary. It will show volume by listed stock and the various market centers.
You can then go to https://nasdaqtrader.com/ to see what they call “tape A,” “tape B,” and “tape C” volumes by the various NASDAQ-run exchanges (Boston, PSX, and PHLX). You’ll find a large gap between the total market volume and the cumulative total of each of these market centers. The best I could do was merge these sites and make the assumption that the balance was traded on electronic communication networks (ECNs) as market centers, such as BATS, EDGE, and so on. The “dark pools” would have to make up the difference, although they, too, are reported to a market center for clearance.
Not one of my best answers, and I invite any reader to tell me about a better way to find this information. Let me know at donbright@brighttrading.net.
REBATE TRADING REVISITED
A couple of years ago, you said you thought rebate trading was coming to an end. I read lately where you are now applauding some changes that make rebate trading valuable again. I trade a medium-sized account at a large retail firm, and I don’t seem to be able to determine if I’m paying extra or collecting some sort of rebate. When I call them, they only say that they have something like all-inclusive pricing. I’m a little upset and really confused. Can you help me? —Jake Ali
First off, please don’t be upset until you have a handle on all the costs involved in trading stocks with your firm. At that point, if you feel you can get better pricing treatment elsewhere, please make a change.
Now, let’s do some redefining of “rebate trading.” A few years ago, there were several Canadian firms that were doing really well gaming the system. A friend of mine owned a pretty large firm up there, and he explained that they would simply hire 19-year-old video game players and show them how to provide liquidity in low-priced stocks, collecting money on each side of the trade. The firm would negotiate a single price for commission on each of a handful of symbols. The traders would only be allowed to trade these specific symbols and share in the proceeds.
For example, the firm would pay $250 per day to a usually second-tier clearing firm to cover the execution costs. Then they would charge the trader what seemed to be a ridiculously low commission rate whenever they traded. They would park orders on the bid and offer of these symbols and collect up to a 20-cent per 100-share fee for providing liquidity. If they could keep their costs under that number, they could make money, and they did for years. It’s my understanding that this model has now become outdated or is under the radar of regulators.
On the plus side, and what caused my renewed interest in collecting rebates, is the advent of better “smart” order routers within the industry. For example, we can first route orders to hit the destination, like SigmaX or ARCA, to collect the largest rebate amount. We can also use hot keys to route orders to the best possible destination for our needs. For example, I will park an order on the ARCA ECN if I want to be filled, but not such a priority that I “must” be filled. If I pay, say, 40 cents per 100 shares, and collect 20 cents or more for providing liquidity, then my commission costs are cut in half. Even the primary exchanges like the NYSE are now paying for providing liquidity. Be sure to check with your broker to see if they are “flowed through” to you, or if they keep them at the firm.
Now, sometimes we have to be filled right now. So we must hit the bid or take out the offering price in the stock. We can get paid for “taking” liquidity as well. Not usually as much, of course, but we can negate the cost of taking liquidity at the higher-priced market centers. For example, on ARCA, our traders would “pay” 30 cents per 100 shares for taking liquidity, and collect 20 cents for providing liquidity. But we get paid from 1.5 cents to five cents to take liquidity on EDGE or BATS ECNs. These prices vary based on various parameters. The trader was collecting about 45 cents for 200 shares for providing liquidity several times and paying 25 cents for 100 shares for taking liquidity, with other examples thrown in. Traders have saved or made a couple thousand dollars per month with proper order routing.
We hold free workshops that cover these types of things. If you are interested, send email to donbright@brighttrading.net with “Workshops” in the subject line.
So get all the facts, compare your brokers, and make more money.