NASD v. NYSE Lets get Ready to Rumble
(this one is a bit long..those adverse, hit the next button)
I figured I would post this up here and see what kind of feeback I get on it. The following is the very rough beginnings of a piece I am writing for a financial traders' magazine. Allie McBeal was far too boring to watch last nite, so I slapped together some ideas.
Please note that these are rough ideas so don't hang me for my spelling or grammar. I respect much of the dialogue that goes on these threads and felt it would be a great place to fine tune my ideas and to raise the level of discussion and possible help some traders.
NYSE vs. NASD
Through my experience as head trader at our firm, relationships with various rofessional traders and other market participants on Wall Street, client/traders, floor brokers, specialists, newbie and experienced internet traders,including many who I have come to know on these threads, various chatsites and through various correspondences, including those who have been exceptionally successful and those who have failed, I have come to an
opinion regarding stock and marketplace selection.
My opinion is that many fail to trade the most liquid, most linear, highest quality stocks on the most liquid and fare marketplace, the NYSE, instead focusing on the story, super-active stocks of the day on the Nasdaq, and in doing so miss tremendous opportunities trading profits.
Many traders, especially those who do their trading from home as well as those in the new wave of SOES parlors that have emerged, those found in various internet chat IRC rooms and various other chat sites gravitate to a select number of highly active, story
stocks, that eventually fill the air with CNBC coverage.
Many are lured by the 'immediate' executions of SOES and the graphic,
dynamic Level 2 displays. Extreme volatility, wide trading ranges and
swift movement of market makers have a natural appeal to the NASDAQ day trader. Many do wonderfully, realizing tremendous gains and do so with intense discipline and scrutiny of every opportunity.
Nonetheless, it is my opinion that simply trading such stocks is like
flying a plane through a tornado, a voyage that could end with incredible success for some, yet for most, ends up in total disaster, which of the two not known until a few harried minutes pass by. Whew! Wipe your brow, thank god and get ready for round 2 or go home shell shocked, wondering how with the market moving during the day to record highs, you got crushed.
Most professional traders are attempting to develop a business, something they can come to rely upon day-in, day-out, for steady income, enough that they are willing to commit their livelihoods and principal to it, as well as the opportunity cost of missing the 30+% the SP500 funds generated in the last 3 years. As a result, my feeling is that most traders should come to look for singles and doubles, the occasional triple and take but not swing for, the rare homerun.
In my opinion, playing the KTELS, SEVLs, ENMD, etc. other story stocks of the day is difficult at best and often turns on simple luck, rather than skill. Many of these stocks trade with such volume and action that it becomes almost too fluid, with no discernible direction, with most market makers probably not knowing what their positions are, or where they want the stock to go (because it is already to one extreme by a wide margin)rather simply trying to make the spread with flow from both sides, avoiding losing stock or getting hit with stock when the market moves against them
so quickly.
Most of these stocks are being driven by day traders chasing the elusive market maker, hoping for that split second soes execution which usually comes when the stock begins to move against them. Such volatility, given its lack of linearity, is nothing one can rely upon. In my opinion, having traded these stocks myself and having faced major losses and significant gains, having seen others trade such stocks, is that many do more praying than analysis of action, keeping tight stops so to fight another day.
Rather, my suggestion is too look for stocks where intra-day patterns and behavior can be seen, not so voluminous that the action becomes nearly liquid, but enough that there is a high probability of a trading range sufficient to yield intra-day gains. As well, look for stocks based on a sector analysis; buystocks in sectors where the money is flowing for the day, short stocks where capital is
fleeing, timing, of course, being critical to both. I suggest looking for stocks where larger players, not the flock of daytrader, but a few capital rich mutual funds or institutions, are beginning to accumulate a position. Look for that particular action that indicates that the stock is under accumulation today
and has greater odds of moving higher than lower from your purchase/sale point. (The particular action, ah, that is the key and its something that could take a full week to even get close to hashing out, derived mainly from experience.)
The result is that the trader develops skills in reading the market, guaging action, understanding the relationships of the market participants to the stock action, the relevance of certain
Prints and market conditions, etc. Such trader develops skills which complement the intuitive feel necessary to be a successful trader.
In addition to my argument about stock selection, I think many traders miss significant opportunities as a result of their singular focus on the NASDAQ as the marketplace of choice, ignoring the NYSE or AMEX.
The benefits of the Nasdaq are the timeliness of the various executions, including SOES, SNET, ECN routing, as well as the graphic, dynamic display of those market makers in the particular security. Those are the benefits.
I consider the drawbacks or 'challenges' signficant in varying degrees, including, size and time limitations for SOES orders, role and potential manipulation by market making firms, limited
exposure firms present, most only offering or bidding for lots of 1000.
The NYSE and AMEX, while they do not offer level two graphical display of the 'full' picture, does provide the following benefits: liquidity, true bids and offers which could be executed against to their full extent, immediate display of your bid/offer when improving
the market, improved linearity in stock movements, as well, SUPERDOT, offers executions and reporting on par with the best SOES executions. Much of course depends on whether you are improving the inside market or simply paying the offer/selling on the bid, yet
if you do improve the market, or just miss the offer with your limit order, you are going to get filled quickly, almost immediately, or immediately improve the inside market.
For example, if I were to look at a stock on the NYSE, lets say 10 1/4 to 10 1/2, and I placed an order to buy stock at 10 3/8, the order, if routed on Superdot, would get down to the NYSE almost immediately. If there is a seller in crowd or if the
specialist is holding a piece off the book, you will get filled immediately, and if not, the stock should become 10 3/8 to 10 1/2 almost immediately. Unlike the NASDAQ, which gives market makers about 30 seconds according to manning rules to make
the market, the specialists on the NYSE are far more fair in quickly filling or representing your order.
As well, the greatest advantage of the NYSE is the liquidity, the depth of the bids/offers. For example, if i were to buy a stock at 34 1/4 and did so because of a 40,000 share bid at 34 1/8,
I can feel comfortable that in fact 40,000 shares would have to be sold at that bid for me to lose that bid. Clearly, the bidder could step away, but in putting that bid out there, the bidder risks
getting hit.
On the NASDAQ, you could have 20 bidders eaching bitting for 1000 shares. At that point, market makers could simply "join' the bidding, knowing they have little chance of getting hit since
if any bidders start leaving the bid, they will leave also, far before they get hit with anything. This is how the bids/offers disappear so quickly. Its not that themarket maker is infact executed against, but that the mm has adjusted their market almost instantly seeing other action in the markets. This sort of movement without execution is even more likely and commonplace in the story/action stocks of the day.
As well, on the NYSE since there is simply one person/firm (the specialist) responsible for maintaining the orderly market, there is ittle chance of a stock printing through your bid. ie. how many times
on nasdaq have you put in a bid at 10 3/8, seen lots of prints at 3/8 , even seen prints at 1/4, and then the stock moves higher without you getting filled. Since it is an orderly market (or tries to be) made by a specialist, all opening market orders and all market on close are printed at same price, stop orders and limit orders and stop limit orders can be fairly maintained, and the stock can not print through you without your receiving a fill.
Much of what I am presenting here was analyzed and used as the catalyst for St. Jude Medical's decision to move from the Nasdaq to the NYSE. At the time, the CEO? or CFO? had done some indepth analysis and researchon the linearity, volatility and liquidity of the two exchanges. In the end, they chose to move to the NYSE. I dont have the research, but you could consider calling the company or searching news archives for STJ about the time they moved to the NYSE from NASDAQ. If anyone finds it please email it to me.
My personal trading, whether it be day trading or position trading, has seen far greater success when I focus on NYSE and AMEX issue. NASDAQ issues comprise less than 20% of my trading and when I do trade NASDAQ, it is usually companies that are trading more than 500k shares but not more than 2,3 million. When I do trade NASDAQ, it is usually some less active issue that is starting to gain some steam, some accumulation, the right combination of prints, bid/offer action
by market makers, and something I feel reasonably comfortable, that if the stock turns down, there would be a reasonable bid to hit, not market makers running for the hills. Any time that I have traded one of these story stocks, it is either a trade during which I am overly tense worried that the stock could dive « on me in the 2 seconds my order is registering on a tremendous NASDAQ cue.
I also feel that the SUPERDOT, if used properly, offers as good an execution as any soes without any time or size limitations. The premise of this argument is that you are dealing with a firm that handles the NYSE superdot as expediently and fairly as they do NASDAQ, that is,no nondiscriminatorily routing to third market makers, use of electronic systems (superdot) aetc. The NYSE has some work to do, to get more detailed information to the retail investor. If they would provide a means of showing the full inside book, it would greatly improve their standing amongst active participants, if they even desire this type of attention.
I am not minimizing the tremendous returns of those traders who have been successful simply trading such NASDAQ issues. Congratulations to them! Perhaps I simply don't have those skills or that 'eye'. I never claim to know it all or be great at all kinds of trading, but what I do know is that I do quite well trading NYSE and quality issues, and cringe when I hear about people losing lots of money in the best bull market ever. In my experiences and relationships, I have known very few that sustain long term success with such trading. Regardless of which systems, marketplaces or stocks you trade, if you want to be a professional trader, I would suggest you research and learn every component of the markets. You have nothing to lose. You might even learn something valuable that helps get you to the next level.
Regards,
Steve@yamner.com
yamner.com
nyse.com
amex.com |
