Dan:
I agree with everything you wrote.
After plunking down $5K to learn the trade from seasoned pros, dedicating weeks of my time to preparation and practice, I went live about this time last year. I soon discovered as you have that things do not work as they are supposed to work. MMs will back away from SNET orders far more often than they will fill them, SOES is at best a crap shoot, etc, etc.
This is a great commentary that most new traders need to understand. Unfortunately, this is the 'dirty little secret' that daytrading books don't seem to point out. Or, perhaps the books are all outdated and were written back when SOES and SNET were more useful.
But mostly, being confronted with the fact that the "system" is heavily stacked against the individual trader sent me a clear signal to look for another way. I'm now looking hard at position trading and option strategies, etc, but still there is the challenge of trading that gets the blood rushing a bit.
Another intriguing idea would be to continue to daytrade, but by using a discount broker versus a daytrading broker. I have been considering using a discount broker for some time for several reasons. The obvious, but less important reason, is the cheaper commission rates of $7 to $15 per ticket. However, the most important reason for considering a discount broker is for the prospect of getting better fills on your orders. Let me expand on this a bit.
How do you get your orders filled in the Nasdaq market? Well, certainly, most daytraders use brokers who offer direct and high speed access to the market. Brokers such as MB Trading, CyberTrader, AB Watley, Castle Securities, etc. These brokers offer access to tools such as the SOES system, SelectNet, ECN posting, etc. Unfortunately, using the SOES and SNET system forces you to send your order to a market making firm. If it appears that the stock is moving against their posted quote, the market maker WILL NOT fill your order (despite the fact that their order remains posted on your level II screen). Why would they? Would you, if in their shoes? Their job is to make money for their company, subject to following the rules imposed by Nasdaq. In the past year, the rules have become even more heavily slanted in their favor, as you pointed out. As a result, they have a relatively easy time of screwing you, legally, and making money for their company.
Well, if we daytraders are going to make money, we have to find a way to deal with it. How about ECN's? Well, ECN's are a great way to buy stock against the short term trend of the market. In other words, if the stock is moving lower, but you sense that it is about to reverse and move higher, => You can post a bid on ISLD and get filled at the bid (if you're lucky, you might get filled buying 1-2 levels beneath the bid). In this case, you have 'won' the spread. The challenge is determining whether your stock will now reverse as expected.
Assuming you like to play momentum trades, which is common among daytraders. You will not have the luxury of getting filled on an ECN post at the bid. As you know, when a stock is trading higher rapidly, there are NO trades being executed at the bid. None. Zero. It doesn't matter that you're posted their, NOBODY is selling. To get filled using an ECN, you will have to bid several levels above the inside ask in order to get filled on ISLD, which will make it even more difficult to make a profit.
Eric, you say, get to the point about discount brokers! Well, the point is this. Market makers do not get paid to execute daytraders orders unless they can make money for the firm (i.e. screw you). ECN's don't typically aren't available at the ask, when you want to buy is a rapidely rising market. The key, might be, to get your orders filled by the evil market makers. But how?
Well, although the market makers don't get paid to execute daytraders orders (daytraders are too smart, with Level II and all), market makers are paid to execute orders from the customers of discount brokers. It's called 'payment for order flow' and we're all probably familiar with it. Market making firms can afford to pay discount brokers for the priviledge of executing their orders since these orders are typically 'dumb' orders which are profitable for the firm. As a result, market makers have auto-execution systems which will quickly fill all orders from these discount brokers. As a whole, this is very profitable for them. Some daytraders have learned that, by placing market orders with their discount broker, they are able to get much better fills than they otherwise were able to get. In other words, the market maker will be much more likely to execute your order if it is coming from a discount broker (typically 'dumb' orders) versus coming from the SOES or SNET system (typically much 'smarter' orders).
Anyway, this is the logic I attribute behind successful daytraders using discount brokers. As always, the key to success is just getting your orders filled.
Good luck, and thanks for the excellent post.
-Eric |
