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Strategies & Market Trends : The Final Frontier - Online Remote Trading -- Ignore unavailable to you. Want to Upgrade?

To: Morpher who wrote (7520)	7/8/1999 1:33:00 AM
From: jaison	Read Replies (1) \| Respond to of 12617

nytimes.com. >>NASD's Quality of Markets committee will consider a proposal this summer for a single-price opening.<< By EDWARD WYATT NEW YORK -- When DrKoop.com announced an $89 million deal on Tuesday to provide its health-information services to the 17 million subscribers of America Online, investors rushed to trade both stocks. Those who bought and sold America Online shares in the opening minutes of trading all got close to the same price, but those who traded DrKoop.com got prices that varied by as much as $2 a share on a $35 stock. The early-morning volatility illustrates not just the power of the Internet but also the sharp differences in how stocks are traded on the NASDAQ stock market, which is home to DrKoop.com, and on the New York Stock Exchange, where America Online shares are listed. Some big traders and institutional investors say the way NASDAQ opens trading each day has bred chaos, and they are calling for change. "The opening of trading on NASDAQ is a complete disaster and has been for some time," said Michael Cormack, manager of equity trading at American Century Mutual Funds in Kansas City, Mo. "And NASDAQ has been very noncommittal about what they will do about it." Under pressure both from traders and from a raft of upstart competitors, NASDAQ officials now say their committee of market specialists is considering something that would have been unthinkable a few years ago: creating a single-price opening for NASDAQ stocks, guaranteeing that everyone who wants to trade at the opening gets the same price. For investors, such a fundamental change in how the market works could mean more consistent prices for NASDAQ stocks and the end of an often maddening process that produces big price swings, particularly in the opening minutes of trading. Online investors who watch the market to determine if their orders are being executed at the best possible price are now left to wonder if big price swings are costing them whatever money they saved in low commissions. An examination of trading early Tuesday makes clear the concerns. The strong demand for America Online shares caused the New York Stock Exchange to delay opening the stock for 10 minutes while the specialist responsible for maintaining orderly trading in America Online stock tried to match buy and sell orders to determine the best opening price. When trading finally began at $119.9375, up 4 percent from the stock's previous closing price of $115.25, roughly 1.5 million shares changed hands in the first minute of trading, all at that single price. And over the next several minutes, hundreds of thousands more shares traded in a range of less than 25 cents above or below the opening mark. Trading was not nearly as orderly for investors seeking to buy or sell shares of DrKoop.com, which, like virtually all NASDAQ stocks, started trading promptly at 9:30 a.m. Demand for DrKoop.com shares was evident in the first trade, which came at $35.50, up 50 percent from the previous close of $23.625. But seconds later DrKoop.com traded for as much as $1 more than the opening price and, in the first three minutes, for as much as $1 below the opening. To be sure, shares of America Online, one of the largest Internet companies, are far more liquid and less volatile than those of DrKoop.com, which went public only last month with the imprimatur of Dr. C. Everett Koop, a former surgeon general of the United States. Richard Ketchum, president of the National Association of Securities Dealers, which oversees the NASDAQ market, said he objected to comparing a small stock like DrKoop.com with a giant like America Online, even if both are Internet companies. Given DrKoop.com's small size, Ketchum said, a range of trading such as investors saw at the opening on Tuesday "is a pretty solid result." But the general pattern is one that experienced traders say they see every day in stocks big and small -- one that cuts into the profits of both individual and institutional investors. The situation on NASDAQ has been made worse by the rapid growth of online trading. Customers of firms like Charles Schwab & Co. and ETrade are more likely than traditional brokerage clients to enter orders to buy and sell shares while the market is closed, creating a large backlog of trades waiting to be executed in the market's opening minutes. Many market professionals also say the problem is an unintended result of the federal government's investigation several years ago of reputed collusion among NASDAQ market makers. One trader for a regional brokerage firm says that when he had a big order to buy shares of a certain stock, he used to call other trading desks before the market opened and sound out whether they were likely to be buying or selling, and in what quantities. "It would be like a poker game, where you'd go around the table and everyone would talk about what they'd be bidding, so you'd be vaguely prepared," he said. To avoid discussions that might be interpreted as collusion, many NASDAQ market makers now avoid talking to one another. Today, NASDAQ trading rooms resemble libraries where every patron is connected to a computer network, with the dominant sound the hum of an air-conditioner punctuated by the staccato clicks of dozens of computer mice. So many market professionals have pushed for a change, Ketchum said, that NASD's Quality of Markets committee will consider a proposal this summer for a single-price opening. The committee, which is made up of institutional investors, market makers and representatives of individual investors, has looked at a wide variety of trading issues, including volatility in Internet stocks, in recent months. The idea of a single-price opening, while far from a consensus, has been gathering momentum. If the committee adopts the idea, it will go to the full NASDAQ board for approval. NASDAQ officials, who already have their hands full forging joint ventures with foreign markets and considering whether to extend the trading day, say they remain reluctant to make such a drastic move about the opening. Instead, they have proposed a more modest change, one in technical trading rules, that they say would smooth out the market opening. "We have not heard that people are getting wildly different prices off the opening, nor do we see it from a surveillance standpoint," Ketchum said. "There have been delays in the timeliness of trades being reported when there are a large number of trades being handled at the opening. But our surveillance shows that those shares are trading at the right prices." Ketchum added that NASDAQ's longstanding objection to a single-price system was that trading in some stocks would be delayed, rather than beginning promptly at 9:30. A single-price system, he said, "is great if it comes up with the right price quickly, but not if it results in substantial delays when people want to trade." Critics and competitors say NASDAQ is reluctant to take a more drastic step because doing so would probably cut into the profits of many of the brokerage firms that make markets in NASDAQ stocks -- the very firms that make up the membership of NASD. "The New York exchange, with its auction-like opening, has a fundamentally better opening process than NASDAQ," said Douglas Atkin, president and chief executive of Instinet, which operates an electronic trading system that competes with both exchanges. "Everyone benefits when supply and demand meet once and you get one official opening price." The rise of many more electronic trading systems like Instinet and Archipelago, which is 5 percent owned by American Century, is putting additional pressure on NASDAQ to respond to traders' complaints. The complaints have been enough to persuade Bernard Madoff Investment Securities and Knight Securities, two big trading firms, to guarantee a single price to customers who want to trade at the opening -- a move that might serve as a model for NASDAQ. The benefit of a guaranteed single opening price is that investors essentially trade directly with each other, rather than with a market maker who profits from the spread between the bid, or the purchase price, and the offer, which is the seller's price. Bernard Madoff Investment Securities, a New York broker-dealer that makes a market in the 200 biggest NASDAQ stocks, began offering in May to execute opening trades at the midpoint of the best bid and offer prices being quoted by all firms making a market in a stock. "Customers object to paying the spread on the opening, and they have asked us why can't there be a single price on the opening like on the New York Stock Exchange," said Bernard Madoff, president of the firm. "This is exactly the system that the specialist uses on the floor of the New York Stock Exchange." But traders at some competing firms criticize Madoff's system, and one like it from Knight, saying that to guarantee an opening price, those market makers simply post higher than normal quotes before the market opens. That causes the best bid and offer prices to rise and increases the likelihood that the guaranteeing market maker can trade at a profit from his own inventory of stocks. Kenneth Pasternak, chief executive of Knight's parent company, Knight/Trimark Group, sees nothing wrong with helping customers and making a profit at the same time. "If we're going to provide a lot of liquidity at the opening, we're going to do it at prices that are favorable to us," Pasternak said. "The money we make in the first 10 minutes of the day is less than the money we make in any other 10 minutes of the day." If customers think his firm has unfairly bid up the opening price, he added, they "can set limits or cancel orders." While NASDAQ considers the possibility of a single-price opening, it is taking other steps to smooth out the gyrations in the market's opening minutes. It has already instituted rules for opening trading in initial public offerings on their first day. And a NASDAQ proposal awaiting approval by the Securities and Exchange Commission would change some technical rules that govern the period just before the opening of trading, when market makers are jostling for position. Sometimes, a market maker with unusual demand or supply of a stock will create in that time what is known as a "locked" market, when the best bid price is equal to the best offer price, or a "crossed" market, when the best bid is above the best offer. Under current rules, market makers can create such a market without being forced to execute a trade at the unusual price. The pending rules would compel any trader who locks or crosses a market in the 10 minutes before trading begins to trade at that price. Locked and crossed markets "are the primary problem at the opening," Ketchum said, one that should be solved by the new rules. Ketchum acknowledges that if NASDAQ moves to a single-price opening, there is some promise in computer systems that match orders and open a stock at whatever price will allow the most shares to trade. But he maintains that bigger, more widely held stocks like Intel and Microsoft usually operate with very small price changes, making them comparable to anything on the Big Board. And, he said, they always start trading on time.

To: Morpher who wrote (7520)	7/8/1999 6:42:00 PM
From: TFF	Read Replies (3) \| Respond to of 12617

Cool tools for faster, cheaper stock trades MSN Investor New Net brokers like A.B. Watley and CyBerCorp put investors almost on a par with the pros by providing access to tools with real-time information and the ability to execute stock trades in seconds. By Mike Robbins Online investors can make $5 trades, access real-time price data and receive confirmation of their transactions in minutes or less. In short, life is good. But as any active Internet trader could tell you, it could be better. Those $5 trades don't mean much if poor execution costs you thousands in lost profits. Real-time price data might be nice, but the current bid and ask are hardly the only pertinent information out there. Besides, without real-time executions, the value of real-time information is diminished. And just about every Internet investor must know what it feels like to be left uncertain if a trade has gone through. For the most active traders, a delay of minutes can seem like days. Now active traders willing to spend a bit more per trade, say $15 to $25 instead of $5 to $10, can take a big step forward in terms of execution speed, access to real-time information and perhaps even the quality of execution. In fact, firms including A.B. Watley and CyBerCorp promise to put individual investors nearly on par with the professionals. Precisely what do you get for the extra money? Actually, quite a bit, although that doesn't make this right for everyone. Improved execution When you place a trade through a conventional Internet broker, all you're really doing is using the Internet to contact a traditional broker. You still must rely on the broker to execute your trade quickly and at the best possible price. Unfortunately, this doesn't always occur. There is considerable debate on just how good or bad the execution received by Internet investors truly is. Brokers sometimes experience trading delays, and they sometimes sell orders to market makers who in turn might delay making the trade until they can make a greater profit -- at the investor's expense. What firms such as Watley or CyBerCorp offer is the ability to place trades directly. No broker or middleman stands between the investor and the market. Just hit "Buy," and your trade has been placed. According to A.B. Watley, orders typically reach their destination in less than one second, and confirmation time averages between three and four seconds. This speed might not mean a great deal to the buy-and-hold set, but it's the sort of benefit that day traders love. Perhaps even more intriguing is the prospect that executions won't just be faster, they'll be better. That's because by investing through these new brokers, investors gain access to electronic communications networks (ECN). ECNs essentially are private alternative stock markets where buyers and sellers are matched up directly. There's no market maker serving a middleman, so there's no spread. Thus, trading directly through an ECN can save an investor perhaps 1/16 to 1/4 per share per trade -- amounts that will add up quickly for active traders of large blocks of shares. But be warned that ECNs are for the most part new; all but one began after the SEC's Nasdaq order-handling rules changes of 1997. And they still have their doubters. "You get rapid execution for ECNs, but it's not clear that you always get the best execution," says Jack Wing, executive director of the Center for the Study of Law and Financial Markets and a past governor of the National Association of Securities Dealers. "A 10-million-person ECN will offer great executions, but a two-person ECN won't. They need to achieve a certain size." Perhaps, counter firms such as CyBerCorp, but while any one ECN may or may not offer a great execution on a given stock at any given moment, investors would be very likely to benefit if they were given the option of selecting the best price available from a range of ECNs (there recently were at least nine, although some remain quite small) and market makers -- or better yet, if the best price was found for them. "I used to be a flight instructor, and handing this information to people is like sitting them in a cockpit and saying, 'Read the manual, then go fly.' " -- Day trader Brian June CyBerCorp's CyBerBroker, for example, is designed to route trades automatically to the best price currently available from a range of ECNs or market makers, or to allow investors to choose their own trading partner. Meanwhile, the ECNs are rapidly gaining the scale that they'll need to succeed, accounting for 18% of all Nasdaq trade executions in the first quarter of 1999, according to E-Offering estimates. Still, ECNs might not be appropriate for all situations or all investors. "If you need to place a market order, then an ECN might not be appropriate," says Gary Craft, senior analyst with E-Offering. "And if you don't understand the right time or price to place a limit order, that's going to mean a lot more than whether you pay a spread." Reams of real-time data Buy-and-hold investors might be able to use data that's a few days old, but active trading strategies require real-time information. Yet many day traders have little real-time data beyond the current best bid and asked prices. These numbers tell only part of the story. Many of the firms offering investors direct trading through ECNs also allow investors access to Nasdaq Level II screens, a view of the market that professional traders have long employed. (Some conventional Internet brokers, such as E*Trade, also have begun to offer Level II screens to their most-frequent traders.) These screens provide not only the current highest bid and lowest asking price, but also: Time and sales. Rather than just watch the price, investors with Level II data can see each trade happen, with the exact price and time listed for the most recent trades. "There's a definite advantage to seeing this," says Johnny White, CyBerCorp's CyBerTrader product manager. "It's what's driving the price of stocks." Other bids and offers. Level II provides a list of bids and offers, as well as the number of shares involved, not just the best bid and offer price. This can provide a vital glimpse at the market's depth: If there are 10 listings on the top bid price, but only one listing of limited size for the lowest offer, it might be a tip-off that the price could be about to head up. The names behind the trades. On Level II screens, market makers are identified with their bids and offers. On occasion, who's making a trade can be as informative as the price at which the trade is made. "You can start to learn what different market makers' intentions are," says White. "For example, if I see a Goldman Sachs or Morgan Stanley on the uptick, it might mean more than if it's coming from a Knight Trimark, since it's institutional volume instead of just order filling." But be warned that putting Level II screens to use is not a simple process. Even many professional investors will admit that the first time they had access to this real-time data they over-traded and misinterpreted information -- so proceed with caution. "I think this information is wonderful," says Brian June, an electronic day trader. "But I used to be a flight instructor, and handing this information to people is like sitting them in a cockpit and saying, 'Read the manual, then go fly.' I had 20 years' trading experience when I first got Level II, and I still made costly mistakes." Extended trading hours With many ECNs, trades can be placed perhaps a half an hour or more before the open or after the close. This can give knowledgeable ECN investors the jump on other investors. But since liquidity can be particularly light in off-hours trading, this, too, should be approached with caution. "In the end, when you trade is not as important as how you trade," says Ray Kelly, manager of K&S Global hedge fund. Many analysts believe that direct access to ECNs and Level II data is likely to become more common over the next two years. But for the time being, you'll probably have to go to a firm that's a bit less familiar if such services are important to you. Among the biggest names in the business are A.B. Watley, with its Ultimate Trader, and CyBerCorp, with its CyBerBroker. Other top players include Tradescape.com, SpeedTrader and The Executioner. Day Trading Stocks.com provides a list of links to firms offering day-trading services. Prices and services vary considerably, so it does pay to shop around. These new brokers aren't right for everyone, but for frequent and knowledgeable traders, they might be worth a look.