Since You AskedQ&A
Since You AskedConfused 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.
ARE CHANGES DOING US GOOD?
Mr. Bright, first of all, I want to thank you for your assistance in the past. You have been kind enough to send back email responses personally, and I read your column in Stocks & Commodities every month.
There have been so many changes in the markets over the last few years, some good, some not so. I am looking forward to a new year of trading and was hoping you could help me with a few issues. Perhaps either give me some solace, or send me in another direction. Thank you in advance:
—Chicagotrademan
Good questions. I’m going to defer, once again, to Dennis Dick, a top Bright trader and CFA, for the first question:
“Adjusting your trading style for the HFT toll: the one thing that high-frequency trading has done is monopolized the top of the order queue. That means the high-frequency traders are always the first to get filled at any pricing increment. They have various tools that allow them to get to the top of the queue, whether through the use of subpennies, order types, or speed.
“For non-HFT traders, it is essential we make adjustments in our trading styles to adapt for this HFT world. The no. 1 adjustment we can make is to take liquidity (buying at the ask, selling at the bid). This takes the high-frequency traders out of the game. The cost to take them out of the game is the spread. That is the toll they take from us for trading.
“If we are being forced to pay the spread, it is important we trade more liquid securities to keep this HFT toll minimized. Many stocks in the Standard & Poor’s 500 have spreads of only $0.01. Stick to these stocks and high-frequency trading will have a minimal impact on your overall trading performance.”
Traders are starting with and keeping more money in their accounts to save money in interest and other carrying costs.As for strategies, I can’t give out details of how some of my people make upward of $100,000 per month, of course. I can share some of the basics once again. I can say that our very top people still trade the openings, and we’ve seen an upsurge in how well the opening strategy is working again. These things tend to go in cycles, and we’re doing well in 2013.
We have seen big changes in how long our traders are holding positions. Sure, we have single daytraders still, but not the kind you might be thinking of. A planned one-day strategy is different from the daytrading of yesteryear. As noted, we have had to adapt to HFT and subpennies and move forward. Traders are starting with and keeping more money in their accounts to save money in interest and other carrying costs. This is probably the most important change I’m seeing. The difference between a $25,000 account and a $50,000 account can save a fortune over the period of a year.
Now, about the MOC imbalance. There does not seem to be the edge we used to have with them. If you watch your personal group of stocks, you can still see some patterns to help you. But as far as playing the MOC strategy itself goes, not so much this year.
Now onto the proliferation of market centers, electronic communication networks (ECNs), routing destinations, and the rest. My opinion is that the marketplace is glutted with too many of these destinations. However, we’ll see how the strong survive.
The jury is still out as to finding any edges between these destinations. It seems doubtful because of the National Market System (NMS) guidelines. However, I am meeting with a couple of groups that will be demonstrating some software to take advantage of all this. I will try to remain neutral until I can say whether something will work.