Hi Mad Bomber; You made a comment about how ISLD is the first to get out of the way. I believe that this is true, and that it is because the high speed execution on ISLD attracts the players with the shortest time scales, and therefore the fastest fingers.
I believe that the market structure of the Nasdaq is that different players bring different time horizons to the market. The institutions are generally in stocks for many weeks at a time. The scalpers try to own stuff for under 5 minutes, while the daytraders look for intraday trades. The swing traders for a couple days. People who "invest" might own stocks for years. (Egad!)
The shorter the time frame, the smaller the average share movement, and therefore the more important the fill. Scalpers have to get precise fills, preferably making the spread, the institutions just don't care. The daytraders are in between. Scalpers naturally have the fastest fingers, and watch the Level2 screen the hardest. So when they sense a change in the wind, they clear out ISLD first. The institutions play the day-charts, or even (God forbid) the fundamentals.
One of my rules, as a (first year) scalper, is to never try to scalp the scalpers. I find that scalping works best when I have an obvious institutional investor as a counterparty. Particularly INCA. When I try to scalp against ISLD, it doesn't work out profitably.
My guess is that the daytraders shouldn't try to daytrade the daytraders, or, worse yet, to scalp the scalpers.
As an example, if a daytrader thinks a stock is going up, he shouldn't let that last 1/16th of a point keep him out of the stock. This kind of attitude would be death to a scalper, but if a daytrader tries to make the spread, he will find that he is not getting into what will turn out to have been great missed trades, but that he is getting filled on all the trades that will turn out to run against him. This is why a daytrader should leave the scalping to the scalpers.
I've been slowly becoming more cognizant of institutional activity. If they want to sell a stock, they don't just hit the bid, that would be disastrous. Instead, they put huge hidden limit orders on INCA, BTRD, or a MM, where they can hide their size. If you see a pattern where a stock should be going up, but is not, (for instance, a breakout to the upside out of consolidation,) it may be that an institution is taking advantage of the daytraders to get out of the stock. The same goes for when they want to buy a stock, though after they have enough shares, they are not adverse to running the stock up, so that they can have big paper profits...
Similarly, daytraders take advantage of the liquidity provided by scalpers in order to enter their positions. This is great, because it allows the scalpers a technique for exiting or entering their scalps, and to make the spread.
This taking of advantage is not intended to describe a situation where one party is taking money from the other, instead I am only trying to describe a situation where the longer time frame market participant is taking advantage of liquidity provided by a shorter time frame participant.
So what is the conclusion from all this? I think the daytraders should take advantage of the liquidity provided by ISLD scalpers, if it is available. Otherwise, they should get their fills any way that they can.
Similarly, I think that investors should always rely on market orders, and never place limit orders, except in cases where a stock has an obvious price it is very likely to test. As an example, I bet a whole bunch of investors are going to place, or have already placed, limit orders to buy AMZN at the $90 to $91 price. Similarly, they should probably place stop losses at the $89 price. (But those stop loss orders should convert to market orders.)
Anyway, just some thoughts.
-- Carl |
