Worth article. Interesting reference to ASND and Goldman MM trading
Plugging Into the Stock Market. Home is Where the Market Is
worth.com
Excerpt mentioning ASND:
One day I watched the buy-sell spread in Ascend
Communications. The bid was $45, and the ask (or offer) was
$45.25. Because the program showed me the extent of the
public's bidding interest below $45 and the standing offers above
$45.25, and because market makers are tagged with
standardized, abbreviated IDs, I had a telescopic view of who
was waiting to pounce. When trading through a traditional or
online discount broker, an investor may learn of bid and ask
prices but rarely knows who is in the market or at what strength.
This is the kind of info day traders live for. On that one day, for
example, I saw that Goldman Sachs had bid $44.88 for 100,000
shares of Ascend. What I would soon learn is that Goldman is a
tough firm to trade against in Ascend stock. I didn't want to be
caught betting against it, in other words--I didn't want to lose out
by selling when Goldman was buying.
By Ted C. Fishman
If i'm going to trade stocks on a daily basis, i want to squeeze
every fraction of a point out of the market. That's how you make
money at it. But until recently, this has been nigh impossible; the
game is rigged against individual investors like me. Either I face
prohibitive commissions or I'm stuck on the expensive side of the
bid-ask spreads. Nor do I have access to the better information
and faster execution that professionals enjoy. This has long
meant that stocks must run up a good ways before I can break
even. All this is finally changing, however: Within just the past six
months, day-trading firms have given amateurs the power to
move in and out of stocks on a minute-by-minute basis in pursuit
of the profits to be made from small _uctuations in share prices.
Thanks to the Internet, investors can initiate trades--without
middlemen--on all exchange-listed and over-the-counter stocks.
Favorable margin requirements encourage large numbers of
trades. And investors can at last access the information without
which active trading is folly. One day-trading firm even claims to
put on an individual's desk "the entire market picture," formerly
the privileged possession of professional traders.
An exaggeration, perhaps, but not a large one. I know, because
I was a professional trader once--I went cold turkey about five
years ago. I liked being around all the money, but the job's
oil-and-water mix of wild action and expectant waiting drove me
from the Chicago trading pits. When I set out to explore the
day-trading world this past May, I found myself in an
environment so close to the pros' that I couldn't help but _ash
back to my former life.
My experience started with a tip from a friend (few day-trading
firms advertise). Townsend Analytics, I was told, had created a
professional software package called RealTick, which was
designed for electronic brokerages. A call to Townsend led me
in turn to Terra Nova Trading, which distributes an adapted
version of Townsend's program, RealTick III, to day-trading
firms. Terra Nova is one of four outfits around the country that
have established an electronic communications network. ECNs
are sometimes described as electronic stock exchanges, but that
only partly captures their essence. Traders do indeed buy and
sell stocks within this virtual marketplace, but an ECN also
functions as a market maker when one of its members does
business with a major stock exchange. Terra Nova does not set
up accounts for day traders at home. Instead, an agent, or
affiliated brokerage house, does. I picked MB Trading, which is
owned by Terra Nova.
MB Trading is based in El Segundo, California, but that should
inconvenience no one: I simply retrieved a few software
programs from its Web site (www.mbtrading.com). The average
account is a surprisingly small $15,000; $7,500 is the required
minimum. A trader's money is sent to a clearinghouse and put
into a margin account that earns 8.25 percent interest; after the
initial software fee, all commissions and margin requirements are
deducted from this account. Ultimately, cost depends on the
volume and frequency of stock plays. Moderately active
traders--two or three trades a day, in other words--should count
on shelling out at least a couple hundred dollars a month in
commissions; active traders will pay far more. Still, just a few
years ago, such a trading station in my home office would have
necessitated custom software and a proprietary hardwired
network--and cost up to $25,000 a year to run. As a reviewer
unwilling to return to his former life in more than spirit, I was
given a dummy account with $100,000 in play money.
Realtick III is an active trader's dream program. With it, you can
follow every swing in a stock, create stock charts of almost
every stripe, run several kinds of tickers and sales summaries,
and track profits, losses, and margin requirements. Even a month
of heavy use was not enough time for me to exhaust all of the
program's features, none of which struck me as difficult to set up
or run. Indeed, the greatest challenge may be to give yourself the
opportunity to learn and absorb all of RealTick's capabilities.
Otherwise, you're likely to settle for tickers and the
MarketMakers Display feature.
MarketMakers Display is RealTick III's most important feature,
a screen that reveals both the current market for a chosen stock
and the orders that are said to be "away" from the market (that
are, in other words, priced either above or below the prevailing
bids and asks). For issues trading on the New York and
American stock exchanges, the current market and only those
market makers with the next-best bids and asks are displayed.
For Nasdaq stocks, however, RealTick shows Nasdaq's
so-called Level II screens, which provide a snapshot of all the
action involving a given issue. What a trader sees is essentially a
color-coded table: The top line records the price at which a
stock last traded; the line below that indicates who is offering the
best or highest bidding price and the best or lowest asking price
for that stock; and the columns below that rank and identify
other bids and asks.
One day I watched the buy-sell spread in Ascend
Communications. The bid was $45, and the ask (or offer) was
$45.25. Because the program showed me the extent of the
public's bidding interest below $45 and the standing offers above
$45.25, and because market makers are tagged with
standardized, abbreviated IDs, I had a telescopic view of who
was waiting to pounce. When trading through a traditional or
online discount broker, an investor may learn of bid and ask
prices but rarely knows who is in the market or at what strength.
This is the kind of info day traders live for. On that one day, for
example, I saw that Goldman Sachs had bid $44.88 for 100,000
shares of Ascend. What I would soon learn is that Goldman is a
tough firm to trade against in Ascend stock. I didn't want to be
caught betting against it, in other words--I didn't want to lose out
by selling when Goldman was buying.
Level II screens are essential day-trading tools because they let
traders determine how aggressive buyers and sellers are. Unlike
more conservative trading strategies that seek to profit from big
moves in a stock, successful day trading relies on grabbing a
quick quarter point here, a half point there, as well as on getting
out of weak stocks as close to the entry price as possible. Level
II screens also make short selling--the process of borrowing
shares and then selling them, with the hope that they can be
replaced later for a lower price--a much more viable strategy.
Stocks can be sold short only after an uptick (or increase in
price), which is somewhat easier to anticipate when it's possible
to gauge the aggressiveness of market makers. My best trade--
and the one that turned me into a zombie in front of my screen
for two weeks--was a short sale of Dell Computer at $95, three
points off its then recent high. The Level II screens helped me,
I'd like to think, judge the coming of the uptick, and when it
happened, I was ready to act. (I concluded my short sale when
Dell hit $78.)
Taking action is easy: Open an order form, plug in the symbol for
a stock, specify a market or a limit order, and enter the number
of shares. All this can be done with mouse clicks. Another click
sends the order almost instantly to Nasdaq. (Trades on the New
York Stock Exchange or the AMEX can take a bit longer, but
orders are still filled much faster than they are over the phone
with a broker.) This speed of execution is one of an ECN's most
attractive features--it helped me secure the Dell short sale--and
potentially one of its most dangerous. There is, for example, no
chance for backing out if a sell order is sent instead of a buy
order--a mistake I made more than once.
Ease and speed of execution also facilitate the creation of
baskets of stocks--or portfolios that effectively function as
private mutual funds. RealTick enables you to move in and out of
the entire lot with a few clicks of the mouse--a crucial feature,
because margin requirements often force the liquidation of large
holdings before the end of a trading day. To meet the intraday
margin (the margin for trades that are made and held only until
the close of the trading day), you need to post only 25 percent of
the value of the positions; to hold positions overnight or longer
requires 50 percent. Be forewarned: As in all stock trading,
margin money must be posted within five days of all trades, or
traders are cut off.
I made a few costly errors. On one occasion, I hit the order
button before checking the size of my trade and bought 1,000
shares when I meant to buy only 100. So I built a portfolio that
wouldn't punish me too severely should I commit another like
blunder or be caught getting coffee while the market was
dropping 3,000 points. My market-neutral strategy involved
balancing long positions against short ones. I also traded stocks
in similar industries against one another. I've tried this in the past
at traditional brokerages and found the approach difficult to
manage; making money by trading neutral positions demands that
you watch stocks closely and then act swiftly. But with
RealTick's Level II screens, I had no trouble following the
spreads among Nasdaq share prices or trading in and out of
stocks. In one neutral play, I paired Nokia and Ericsson, two
Scandinavian telecom companies with strong positions in the
cellular market. When one showed more strength, I bought it and
sold the other. The risk-reward on such spreads can be quite
favorable, and there's the added advantage of built-in protection
against a general downturn in the market. Those venturing into
day trading for the first time should consider similar strategies
while they acquire a feel for both a particular trading system and
the broader market.
Professional traders get not only speedy execution and price
information but also constant up-to-the-minute financial news.
RealTick can't match this yet, but this fall it will incorporate--for
an extra fee--a news feed from NewsWare, a computer-based
news service that filters information from more than a hundred
sources, including Dow Jones and Reuters (but not Bloomberg,
alas). A current version, called NewsWatch, can be found at
www.newsware.com. With it, day traders can design any
number of custom news feeds or just follow the built-in streams
that track breaking news. Because RealTick is a proprietary
package that works within the Townsend system, it does not
operate through a Web browser. It can, however, run on a PC
at the same time as a browser open to NewsWatch, say.
Day traders fall into two types so far, according to the folks at
MB Trading: Those who feel their trading skills are good enough
to support them full-time but for whom the challenge is
technological, and those who are Internet-savvy but lack
experience as investors (and have money to play with). Both
groups, once they've experienced the system, tend to either
retreat to some far less active form of trading or go whole hog.
Casual day trading, it seems, is a contradiction in terms.
Certainly, though many investors try, it's hard to see how
someone could devote enough time and energy to succeed at
both day trading and some other job at the same time. Once the
computer started _ashing with numbers and news, I found it
nearly impossible to turn my attention to anything but the money I
was making and losing in the market. My luck with Dell's $17
downdraft, for instance, was accompanied by a near total
fixation on the stock's every move. And that was with phony
money! When it comes to real money, in the long run, anything
less than $25,000 is probably not enough to day trade as more
than a sideline.
So caution is in order. As in all kinds of active investing (but
maybe more so in the case of day trading), success is usually
hard won. In a month, I managed to earn $16,500, but who
knows whether I would've had the gumption to ride my winners
as long had I been trading my own money? Traders ought to be
prepared financially and psychologically to pay for their
education. And even though individual investors can put together
an immensely powerful trading system, the pros still have
advantages. The major distinction between RealTick on a PC
and a true professional trading station is the limit on open
windows. Pros connected to mainframes can have three or four
large computer monitors in front of them with dozens of charts
and graphs displayed at once, with hundreds more at the ready.
PC users can create all the graphics they want, but opening up
more than nine or ten at a time is certain to crash their
computers. (Windows 98 may alleviate this problem.) Perhaps
more important, the pros work in environments where
information comes to them before it hits the news tapes: They
witness the _ow of orders through their trading pits, or trading
rooms, long before outsiders do (by several minutes, in other
words), and they know what their biggest customers are up to.
And though trading firms such as MB Trading charge very low
commissions, pros still pay less. So the edge remains with the
pros. Pros may make 8ths of a point where we make 16ths, but
at least we no longer need a big run-up to break even.
Ted C. Fishman is a contributing editor for Worth.
We welcome your comments and questions. Contact info@worth.com
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