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In the book, Tools and Tactics for the Master Day Trader, Velez
explains Level 2 quotes and ECNs as good as I've seen anywhere. I
trade on ECNs, and it reduces my slippage on both ends of the trade.
Since I don't day trade much, except in sideways markets, I don't use
the ECNs as efficiently as I could. I do like to watch the quotes
because I can see price direction faster than I do on my charts, even
the one minute charts. However, you have to deal with a lot of data
quickly.
Even if you put in market orders on an ECN, your slippage will be
less than you would find putting the market order through your
broker's normal channels. Brokers usually route the order to an
exchange they have a deal with so they get a cut of the spread in
addition to your commision. Often times their share of the spread is
several times more than your commission. Of course, you can't figure
out how much the vig is unless you can see the Level 2 quotes.
Using ECNs as an example, if you put a market order in at say
$28.00, your broker might get it filled at 28.08, where ARCH might
fill it at $28.02. I can force the fill at $28.00 but if they don't
have enough offers to sell coming in at $28 I might only get a
partial fill. Since I'm trading on a longer time horizon, hours, when
I day trade, I'd rather have the total fill at $28.02.
One time I placed a regular market order, it was routed to a midwest
exchange which had no shares for sale in their book. Instead of
passing it to ARCH and moving the order through the system, they held
it. They filled it 15 minutes later while I was watching the NYSE
exchange trade over 100,000 shares at a lower price than the
execution price I got. It took so long to execute the order, I
thought my computer had gone down on me. I kept checking my data
hookup. My broker routed the order to someone who had no shares in
their book, but gave them the fattest cut on the spread when they
finally got some shares to sell. Talk about taking it in the shorts.
I called the broker and told them to hook me up with the ECNs, or I
was gone. For a variety of reasons, they gave me Level 2 for free.
That whole thing was like being in the Twilight Zone! (As if trading
isn't!)
Good luck figuring it out. Stops also execute faster and at better
prices on ECNs. I'm suppose to get IF-Then order control in the next
month or so. That way I can send in an order for X shares at Y price
if the moon is green or if Saddam turns up dead. I can hardly wait
for that.
JO
Have you ever noticed how many books use the word Master in front of
day trader in the title?
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