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Charles Wright wrote:
> I wanted to comment that much
> talk about NASDAQ trading seems to imply that if you put out an order,
> you will get filled
This of course isn't true of any market, and especially NAS.
> If that were true, then the hype about the business might be
> justified.
Well, in one sense modern trading platforms give the trader much more
control over his fills, but on the other hand, this can get the trader into
more trouble without the proper order entry skills.
> Unfortunately, the fills can be miles away from where you
> began entering you order because quotes vaporize.
Again, this is true generally, and this risk is even more prevalent with
the more volatile NAS issues. I've spoken to traders who seem to be
running into this problem too much, but often this seems to be due to
holding the position too long, and/or poor C/R's. Using limit orders for
exits has its advantages over mkt orders of course, but there are times
when timeliness of exits outweighs the risk of a poorer fill that mkt
orders often bring - and especially in cases where levels are being lifted
in rapid succession. I know several very successful day traders who exit
solely with mkt orders.
There are a couple of things that can be done to help minimize this from
happening. First, it is wise to plan your entries in such a way that it
can be determined very early in the play if it is failing or not, allowing
for early exits with very small losses. Personally, I've found that if I
enter a play, and it doesn't show strength my way fairly immediately, the
odds are extremely high that a very quick exit is best, before it has a
chance to come in hard the other way. One way to accomplish this is to
require a minimal level of positive momentum prior to the entry, and seek
to enter at strategic points where the odds are in your favor in the very
short term. Another thing to watch is the level of MM support on the exit
side when entering - for instance, if there is only 2 MM's between your
entry and 1/2 point loss, the risk of a larger loss like this is obviously
higher. Setting your limit one level below the inside mkt with faster
moving stocks also helps.
> My experience with Selectnet was that if the stock began falling away
> and I wanted to sell, the preferenced MM just watched me lower my
> offers as the market makers lowered their bids.
I used to have that happen to me when I first started trading (not with
Selectnet though, but with an internet broker), and you feel like a chump.
The possibility of this happening, unless the stock is extremely illiquid,
isn't very high though. In cases like that, though, it often pays to hold
your ground, and not get suckered into dumping it, just to have the mkt
come back to your original exit.
> They might
> ignore your offer because you're an unknown or worse, a daytrading
> firm -- they know who's who -- and fill a member of the tribe.
This doesn't happen a lot. However, you must realize that not all prints
on T+S are available, as often MM's cross between their books via Instinet.
> And
> dispense with the notion that they'll take stock from anyone who's
> cheapest. Not always true.
If you are alone on the inside, it isn't that common that you will get
ignored this way, though. Money talks for the most part, and even an extra
teenie is still a motivating factor to MM's.
> After all, I'm told their is honor
> among thieves. (My apologies to the honest market maker, wherever he
> or she is).
There is a perception that a lot of MM's aren't "honest," but I think this
is overblown to an extent - although there IS still monkey business
occurring, of course.
> This one of the disadvantages of a dealer market vs. an
> auction market, IMHO (especially when the dealers all belong to the
> same club and that club enforces the rules -- again, IMHO).
In a way - but the SEC is still the last word on all of this - still, it
isn't ideal to have NASDAQ regulate itself in the way that it presently
does - however, they seem to be doing a surprisingly good job under the
circumstances. There is still a long way to go before NAS can be
considered a reasonably fair and efficient market.
> I traded as an employee and at that time SOES was not open to us, but
> if I could have used it I would have to hit the bid one or two levels
> down from me
You can't so that with SOES, though, which is hard enough to use at the
inside market at times. Besides, if you are trading very short term -
scalping for teenies, it's going to be nearly impossible to make money this
way. Moreover, it isn't that common that it becomes necessary to set your
limit that low - you might as well use a mkt order in this case.
> As
> it was, Selectnet rejects (preferenced or otherwise) were a common
> experience for me in the times when I wanted to bail out.
I find this unusual that you would have had *that* many rejects. If this
is a real problem, TNTO, with its auto preferencing, is the way to go
(which is the only way I go Selectnet anyway - manual preferencing can get
you into trouble, as you seem to have discovered).
> Actually, my best hurried exits (and I really relied on this as my
> safety feature because I couldn't use SOES) was to have an Island
> fill-or-kill order all queued up and ready. If I were long, I'd be
> watching for ISLD to pop up on the bid side and I'd blast him ASAP.
Only the more liquid stocks attract that much ISLD action to count on
something like this in times of need, although this is a good idea.
However, speed is of the essence here, and waiting for this to happen can
get you into more trouble.
You paint a pretty frustrating picture of NAS order entry - and while a lot
of your points are valid, it hasn't been my experience, nor the experience
of several others who do this for a living, that it is anywhere near this
difficult to get good fills. Mistakes are going to be made, especially
among novices, but one can develop a pretty good feel for this over time.
What is brought out by all this, however, is the difficulty of SOES style
trading, and while some are modestly successful with this strategy, most
aren't, and it is a difficult way to make a living to be sure. The less
you try to compete with MM's, the better, since, as you mention, they are
apt to be much more skilled at this than you, not to mention having
superior resources and tools at their disposal. A little longer term day
trading - 1/2 hour to several hour average holds, say, seem to be easier to
implement, as well as being more profitable.
Good trading,
A.J.
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