Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading
(www.stocktrading.com), an equity trading corporation, answers a few of
your questions. |
Don Bright of Bright Trading
|
EXIT STRATEGIES AND FAIR VALUE
Two questions: A while back you had some postings regarding some
of your "seasoned traders" who were entering several hundred
orders on the opening each day. Would I be correct in assuming they use
some sort of automated exit strategy? They couldn't possibly trade their
positions individually, as you seem to do. How do they execute this?
Second, someone posted something to the effect of holding onto
a position well after the opening because "Éthe premium [is] out of
whack of fair value [and] É arbitrage will eventually pull things back
to fair value." I thought there was no fair value after the opening.
Otherwise, it seems, you would be constantly calculating and holding positions
much longer than you seem to hold yours. I look foward to your comments.
Thanks - Mitchell Berkowitz
I recently spent a couple of days in one of our Southern California
locations to watch a trader who is entering hundreds of opening-only orders
each day. When I was there, he got filled on about 150 stocks, and proceeded
to work to scale out of the trades, one by one. Our RediPlus systems allow
for easy visualization of the individual stock P&L, and one-click order
entry for closing the trades. A word of caution, however: the traders who
use this strategy are well-capitalized and seasoned professionals, so my
suggestion is to start small and build your way up. We do have some "semi-automated"
approaches to exit strategies, but so far the manual method seems to have
the upper hand.
I've discussed the premium and discount to fair value before. After
the opening, while we use the Standard & Poor's futures valuation as
one factor to determine opening pricing, we continue to keep a close eye
on the futures as they trade. I keep a fair value premium/discount window
right next to my S&P tick chart, so I can see the immediate bias of
the market, up or down. That is what I meant by "following fair value"
after the openings. If a stock opens down, but the futures are showing
a positive premium, there is a good chance the stock will rise with the
overall market.
TRADER EDUCATION
I am a senior in high school and am extremely interested in professional
stock, futures, and/or options trading as my career. Last year, my independent
study course was spent researching various career opportunities associated
with securities trading. I have decided I would like to become an independent
trader. It appears to me that starting out in a proprietary trading firm
may be the best path after finishing college. I am currently in the process
of choosing a college, as well as major and minor courses. I would like
your input regarding what classes or subjects would be most important in
preparation for working in your firm. I would also be very interested in
any opportunities to visit or learn about your trading firm in Minneapolis.
- Alex Newberg
I appreciate your enthusiasm for the markets, and would be glad to discuss
with you the various alternatives. As far as basic education goes, let
me offer a few words of caution: Your finance classes - accounting, business
law, market theory, and the like - will be beneficial to you, but be careful
when it comes to actual stock market or investing courses. Find out what
experience the instructors have before taking their classes. In many cases,
the academics have been taught the "old-school" type of retail
investing, return on investment, sales of mutual funds, and so on. The
realities of Wall Street are far from these basic fundamentals. To get
an idea of the realities, read Reminiscences Of A Stock Operator
by Edwin LéFèvre.
Stay away from "investment counselors" (who are too often
thinly disguised insurance salespeople), brokers and the broker mentality
(churning accounts for their own firms' profits), and the concept of "analysts"
(simply read the financial newspapers of late to see how they are generally
viewed these days). But as in most professions, some really know what they're
doing.
As a possible option, we offer internship programs in several universities
across the country (most for credit, some not). You can apply to your school
and we will support you with the necessary paperwork. These programs are
usually reserved for your junior or senior year, but our local manager
may be able to help you as well. Feel free to contact me again to discuss!
TRADING LINGO
The expressions "leaning on" or being "pressed"
- what exactly do they mean? I've heard some market makers using these
expressions. What sort of trading scenarios would be represented? - TechGuy,
via Message-Boards at Traders.com
"Leaning on" means there is a live order either in the specialist
or market maker's book of orders, or an order displayed on the electronic
communication network (ECN) that you can count on. Pair traders "lean"
on big bids on one stock while buying some shares in another (of the pair),
and if they cannot sell back what they purchased at a good price, then
they "hit the bid" of the stock they were "leaning"
on. I'm not sure about the meaning of "pressed"; on some floors,
it means bumping or "pressing" up the size of an order (say,
from 1,000 shares to 5,000 shares), but there may be another meaning.
E-mail your questions for Bright to Editor@Traders.com, with the
subject line direct to "Don Bright Question."
Originally published in the February 2003 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. ©
Copyright 2003, Technical Analysis, Inc.
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