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Strategies & Market Trends : Rande Is . . . HOME -- Ignore unavailable to you. Want to Upgrade?

To: Rande Is who wrote (23419)	4/5/2000 12:49:00 PM
From: Rande Is	Respond to of 57584

Nasdaq making an attempt toward some new highs. . .this will start getting interesting once it passes 4200. I don't think we will will test the lows again until about the last week of April or first week of May. . . . . .so I am mostly looking for signs of rallying. Rande Is

To: Rande Is who wrote (23419)	4/5/2000 1:01:00 PM
From: JLS	Read Replies (1) \| Respond to of 57584

April 5, 2000 12:11pm Burnham`s Beat: Ripping off the little guy, one trade at a time By Bill Burnham ZDII Every working day, hundreds of thousands of retail investors enter orders to buy and sell stocks and then put their faith in a system that they believe will get them the best price. The dark secret of Wall Street is that retail investors rarely get the best prices and almost everyone knows it. While this issue affects almost all retail investors, it affects Internet investors the most. Net investors are active traders who play the most volatile stocks on the market. This activity provides ample room for Wall Street middlemen to make lots of money, often at the expense of their own customers. Individual Investors: Getting burned? Add your comments to the bottom of this page. As a former Wall Street analyst who covered the online trading industry, I saw the emergence of these questionable trading practices, which have become an accepted way to do business. These practices are unfair to individual investors and highly questionable from both a legal and moral perspective. The Rise of the Wholesaler There are a number of trends that have pushed these practices to the forefront, but the most important is the rise of so-called ?wholesalers.? Wholesalers are large trading firms that aggregate orders from retail brokers and then execute those orders on behalf of the brokers and their retail clients. Indeed, many retail investors are often surprised to learn that their trade is not completed by their own brokerage. These trades are ?outsourced? to one of a handful of powerful wholesalers. Today, these wholesalers have become the primary means by which almost all retail investor orders are executed in the market. Many of the largest wholesalers now account for 30 percent to more than 50 percent of the trading volume in particular stocks. Wholesalers also dominate trading in the hottest Internet stocks. (Ed note: Major wholesalers/market makers include Knight-Trimark (Nasdaq: NITE), Herzog Heine Geduld and Mayer & Schweitzer, recently renamed Schwab Capital Markets L. P.). Orders = Information When brokerages send their customers` orders to a wholesaler, they are sending them valuable information. That`s because these orders represent intentions to buy or sell stocks at specific prices. Professional investors, such as mutual fund managers, guard intentions to buy and sell stocks closely. If anyone in the market were to find out that a large mutual fund firm, such as Fidelity or Janus, was trying to sell a big position, the stock`s price could fall dramatically. Professional investors also try to prevent their own brokerage firm from finding out their true intentions. These investors realize that if a trader had knowledge of a big sale on deck, he would try to profit by buying or selling stock in advance of the order. In the professional investing world, if an investor planned to sell 10 million shares, he would never tell the broker of his intentions. The professional investor would parcel out the trade in smaller increments to keep the brokerage firm`s trader guessing. The Power of Aggregation At first blush, retail investors don`t have the same problem. A decision to sell 100 or 1,000 shares in most cases won`t move the market. However, wholesalers can aggregate tens of thousands of orders in a particular stock. By aggregating all of the individual retail investor orders, wholesalers acquire valuable information that tops any information they`d get from professional investors. As the wholesalers acquire orders, in many cases over 50 percent of the orders in a particular stock, it gets easy to determine whether a stock might go up or down. Imagine the stock market as a giant jigsaw puzzle. If you have 5 percent of a puzzle`s pieces in place it`s tough to see the picture. When half of the pieces are in place, the puzzle is a no-brainer. Once an experienced wholesaler controls 30 percent to 50 percent of the order flow in a particular stock, making money for its own account is like shooting fish in a barrel. The information used to make wholesalers rich comes from retail investors, who have no idea their information is being used at their own expense. Indeed, there are now a whole series of widely accepted trading techniques used on Wall Street that are based on supposedly confidential customer information

To: Rande Is who wrote (23419)	4/5/2000 1:08:00 PM
From: JLS	Respond to of 57584

April 5, 2000 12:19pm Burnham`s Beat Part II: Good morning traders: You`re screwed By Bill Burnham ZDII Part 1: Ripping off the little guy one trade at a time Part 3: Online brokers to the rescue? Talkback: Individual Investors: Getting burned? Good Morning Traders: You`re Screwed One of the most basic examples of such shady techniques occurs just before a stock opens for trading. Let`s say a major wholesaler, one that typically is the top trader in a stock, has a large number of market orders to buy the stock at the open. Based on this information, the wholesaler can be reasonably certain that the stock is going to open higher. With that information, the wholesaler can buy as much stock as possible on `after-hours` markets such as Instinet and the Island ECN before the market opens. Then, just ahead of the opening bell, wholesalers signal to the rest of the market that they had a lot of stock to buy by raising the quote that they display to the public. (The most blatant way to accomplish is to do what`s called `crossing & locking` the market, which essentially means aggressively moving a quote up or down so fast that the whole market has to reset.) Given that the wholesaler is the biggest trader in the stock, the other traders usually stand aside and let him continue raising the quote. Other firms can only assume that he has a lot of orders to buy the stock. The wholesaler`s goal is to boost the opening price of a stock way above the after-hours price. Wholesalers then can easily flip the stock acquired on the after-hours market to the individual investors for a quick profit. Not bad for a few minutes work. Of course, wholesalers claim they are merely doing what the retail investors wanted, which is selling them stock at the opening market price. It`s safe to say that 100 percent of retail investors would have preferred the cheaper after-hours price. In addition, the opening price wouldn`t have jumped if wholesaler didn`t have the retail investor information. Beware of Price Improvement It gets worse. Examples of `managing` the opening price are common knowledge on Wall Street, but they still entail some risk. In the pursuit of almost risk-free arbitrage profits, many wholesalers are now using a tactic called `price improvement.` `Price improvement` occurs when a wholesaler pays more for a stock than the current market price. If a stock is being quoted at a $30 bid (buy) and a $30 1/2 ask (sell) and a customer wants to sell, the wholesaler will actually `price improve` the order and allow the customer to sell for $30 1/16. On the surface, the seller got a better price than expected. The reality of the situation isn`t as rosy, for both the seller AND the buyer in the transaction. Here`s what typically happens with the price improvement: The wholesaler has a limit order that is `at the market.` Limit orders are instructions from customers to buy or sell only at a specific price. In this case, that would mean that the wholesaler has a limit order from a retail investor to buy the stock at $30. If the wholesaler had an `at the market` limit order to buy at $30 from a customer, why didn`t he just match the limit order to buy with the original market order to sell? That`s a tip-off that `price improvement` isn`t what it`s cracked up to be. Rather than match the orders, wholesalers typically increase the bid by 1/16 (the minimum allowed by law) and then they execute the trade, not on behalf of a customer, but on behalf of their own account. In our example, it means that the wholesaler would buy the stock being sold at 30 1/16, rather than simply crossing the order with the open limit order at $30. At first glance, this strategy makes no sense: Why would the market maker buy the stock at $30 1/16 for their own account and take on the risk that the stock would fall. The wholesaler could simply cross the trades? It seems like wild speculation, but market maker is actually executing the trading equivalent of a slam-dunk. The market maker`s maximum loss on the stock is actually limited to 1/16 because he still has a valid limit order at $30. If the price ever started to fall, they would simply sell their stock to the customer who has the limit order. While the downside is limited to 1/16, the market maker never would have made the trade in the first place if he didn`t think the stock was going up. How would the market maker know that? Wholesalers have been given hundreds, perhaps thousands, of open orders to buy or sell at specific prices. That`s great information. If the market maker saw a huge number of open buy orders and a decreasing amount of open sell orders, he would know the stock would go up. In our `price improvement` example, the seller didn`t really get the best price. In all likelihood, the market was about to move sharply higher. The customer with the open limit order to buy never even got a chance to buy because the market maker simply `stepped in front` of the order and then used the retail investor as a backstop in case the market turned. How`s that for a customer-friendly trading strategy? There are a lot of other examples on how wholesalers routinely use customer information to improve their own trading profits -- it`s generally accepted as part of the business.

To: Rande Is who wrote (23419)	4/5/2000 1:11:00 PM
From: JLS	Respond to of 57584

April 5, 2000 12:22pm Burnham`s Beat Part III: Online brokers to the rescue? By Bill Burnham ZDII Part 1: Ripping off the little guy one trade at a time Part 2: Good Morning Traders: You`re Screwed Talkback: Individual Investors: Getting burned? Online Brokers to the Rescue? If individual investors were really being taken for a ride, you`d think the online brokerages would come to the rescue. Not quite. Online brokers are in on the action. In return for directing their trades to these wholesalers, online brokers receive `payments for order flow` (also known as rebates). These rebates are kickbacks for excess wholesaler profits derived from retail investor information. The Net brokers have no incentive to cry foul because many are getting millions in monthly payments from wholesalers. Why question the gravy train when you can collect the checks? In fact, several of the largest online brokers own major wholesalers. By owning the wholesalers, these brokers capture 100 percent of the profits from the `information arbitrage.` The strategy enables online brokers to secretly charge far more than the advertised prices. (Ed note: Schwab (NYSE: SCH) and Fidelity own wholesalers. E*Trade (Nasdaq: EGRP), Ameritrade (Nasdaq: AMTD), Waterhouse Securities (NYSE: TWE) and a host of others own stake in Knight-Trimark. What Retail Investors Can Do Wall Street doesn`t seem to care that the market has degenerated into what appears to be an organized front-running operation. As long as wholesalers and traders are allowed to use customer order information for their own benefit, retail investors are at Wall Street`s mercy. Short of getting the SEC and Congress to ban the current practices, here`s what individual investors can do to protect themselves: 1. Don`t enter market orders at the opening bell: As we explained earlier, market orders at the open are a license to steal for wholesalers. 2. Don`t trade within the first hour of the trading session: Given the games played at market open, I would recommend that most investors not trade at all within the first hour of trading. It takes that long for the gamesmanship to play itself out. 3. Use limit orders whenever possible. Market orders are far more malleable to the wholesaler. Limit orders won`t protect you from `price improvement` schemes, but they are better than nothing. 4. Move to a broker that uses ECNs: Aside from limit orders, the best defense is to use a broker who uses one of the major Electronic Communications Networks or ECNs. ECNs are computers that dispassionately match orders between buyers and sellers. ECNs do not trade for their own account and have no profit motive. Of the major online brokers only Datek Online, routinely uses an ECN to book limit orders. While no broker is perfect, Datek`s execution is about as good as you are going to get. Outside of Datek, there are a few other firms, such as Tradescape (which SOFTBANK has an investment in) and CyberCorp (now owned by Schwab) that provide access to multiple ECNs. These firms, however, cater to the most active traders and may not appropriate for all investors. Someday, We Won`t Get Screwed This Way Someday soon the government or the markets may take a close look at these issues and change. Possible changes include requiring market makers to book their limit orders to a third party ECN and establishing a wall between the order book and traders. There`s a slim chance that the wholesalers, and other market makers, will proactively change their practices. But don`t count on it. This is the same crowd that routinely fixed prices on the Nasdaq for decades. Until the government wakes up or hell freezes over, it`s `investor beware` for retail investors. Never assume that your order in being held in confidence. If you factor that fact into your trades you`ll be a better investor for it.

To: Rande Is who wrote (23419)	4/6/2000 1:01:00 PM
From: HG	Respond to of 57584

Thanks Rande, Yes, I've been hit pretty bad...the loss taught me something important - vacations are pretty important... Ducked two corrections this year to the tee....but got tired/exhausted by the intensity of trading and did not close positions at the highs...just didn't want to trade st swings anymore...it was an expensive lesson...keeping fit and adhering to the plan is what its all about... I'm holding a bag full of July to Sept options....looking at exiting at rallies...and taking a break....