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Greetings all.
First, my apologies for the prolonged silence on the list. Recent
changes in trading style and application have given me little free
time lately. :)
In regards to the "Trading For a Living" thread, I happened to think
of an area that has not been previously discussed. It concerns
the analysis and choice of a brokerage/Clearing firm. The shorter the
time frame you trade in, the more important this decision becomes. What
follows is practical knowledge for anyone looking to trade profitably.
**************
Picking a Brokerage/Clearing house:
Understanding Commission, Positive Floor Presence and "Tick Dumping".
COMMISSION
In today's competetive brokerage marketplace, there isn't any reason
why you should *ever* have to pay more than $35.00 per round turn,
regardless of what time frame you trade in. There are many fine
brokerages which can provide excellent service for this amount, and
if you shop around, you can probably find a good firm for as little
as $14-$19 per round turn.
However, low commission charges can be deceptive. The Clearing house you
deal through must have Positive Floor Presence. Inadequate floor
representation often leads to "Tick Dumping", which quickly offsets the
advantages of the lower commission.
FLOOR PRESENCE
Initially your account is introduced to a clearing house by a brokerage
firm. The Broker is the entity which administers to your account, and
the clearing house is the entity which holds your funds in a segregated
account. Your trades are placed to the floor through the clearing house.
Clearing houses place trades with Floor traders, who then execute your
trade. This link between CH and Floor Trader is vital to the optimum
execution of your order. The best CH's directly employ Floor Traders to
trade only for them.
A good Floor Trader will often get you 1 tick
better than the market on an ATM order, and get your price on a
stop order, even if the market is moving fairly rapidly ( fast markets
, illiquid markets and the SP excepted of course. <G>).Occassionaly, he
will even get a limit order filled, if the market touches, but doesn't
trade through your price. This type of Positive Floor Presence is
invaluable to a trader.
An inadequate Floor Presence manifests itself in orders that are *never*
filled in your favor, and are *always* filled under the *worst*
possible scenario. The lost ticks multiply rapidly. This is annoying to
the swing and longer term trader, and is absolute death for the
day-trader. I call this type of equity drain "Tick Dumping".
POSSIBLE SCENARIOS UNDER WHICH TICK DUMPING OCCURS
1. "The Bag"-- A trade in which your order is offered to someone
"off-floor", and often executed to your detriment. This is strictly
illegal, and all houses, exchanges and brokerages insist that this
never happens.
2. Bad Floor Trader - This trader never fights to get you the best
price. Your orders are never filled at better than your price, and if
any price variance occurs that allows a worse fill under the format
of your order, you are filled at that price.
3. Tick Trimming - Let's say you have an option order waiting on the
open to buy at 5 or better. The market opens and trades at 3, and then
moves rapidly to 10. You are filled at 5. Somebody probably collected
the difference between 5 and 3, and it sure wasn't you. If you are
trading an illiquid market, this may just be a function of not being
able to get the trade off, but if your order is in a liquid market,
something isn't right.
EXAMPLES WHICH SHOULD ALERT YOU TO THE POSSIBILITY OF TICK DUMPING:
Scenario
Market: WaltBellies - A liquid market in both futures and options.
WaltBellies trading at 10.00, with no fast market
WaltBelly 15.00 call trading at 6.00
WaltBelly 20.00 call trading at 2.00
Trade 1
You place an order to Buy 10 WaltBellies at 10.70 stop.
WaltBellies trade up to 10.85 then drop to 10.35. WaltBellies then trade
up to 11.00 and drop back to 10.65. At this point a Commercial interest
decides they must have WaltBellies, and the market moves rapidly to
13.00, and then drops back to 12.00
WOW. You are rich!! Eagerly, you call the trading desk to confirm your
fill price. The desk informs you that you were filled at 13.00 !!
You are now DOWN 10.00 !!!!
Trade 2
WaltBellies have dropped back to 10.00
15.00 calls at 6.00
20.00 calls at 2.00
You are skittish of WaltBelly futures now, so you decide to try options.
WaltBelly premium volatility is high, and the expiration date is only
32 days out, so you decide to reduce the decay and total risk
by putting on a vertical bull call spread. The market is liquid, so you
place your order as a spread:
"Buy 10 WaltBelly 15.00 calls and Sell 10 WaltBelly 20.00 calls,
4.00 to the buy side (The spread differential)."
Later that day, the desk calls, and informs you that your order was
filled. You bought 10 15.00 WaltBelly calls at 4.25 and sold 10
WaltBelly 20.00 calls at .25, and you are HOSED. The purpose of
putting on the spread has been almost totally defeated.
Spreads are usually filled at the discretion of the market maker
(the guy that accepts your spread), but your trader should certainly
have fought for a better mix.
Sometimes, these scenarios happen to every trader, but if it happens
to you all the time, it's time to shop for a new trading outfit.
Your commission for a good brokerage and clearing house might be twice
as high, but if they are constantly saving you money when they execute
your trade, the difference is made up quickly.
The only way to test the efficiency of a brokerage and Clearing house,
is to trade through them. Hopefully, the above information will allow
you to gauge the effectiveness of your market representatives.
Walt Downs
CIS Trading
http://cistrader.com
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