Nasdaq Routing

You know about the various ECNs, SOES, and SelectNet. The question

you might be asking about now is, "Which one of these do I

route my order through." Three offer the speed and liquidity that

intraday traders and microtrend traders need.

1. Island (LSLD)

2. Small Order Execution System (SOES)

3. Archipelago (ARCA, TNTO, ARCHIP)

Super DOT: Trading with the Big Boys

Tremendous opportunity exists in trading large-cap stocks on the

New York Stock Exchange (NYSE). Most of the time, when you hear

the term electronic trading you think about using the ECNs and trading

the Nasdaq market. You can trade the NYSE electronically by

accessing the Super DOT system. If your electronic brokerage firm

has an affiliate-member relationship that enables it to route orders

to the floor, you can trade the NYSE electronically. If it does not, you

will not be able to trade the NYSE. In some cases, day trading firms

do not allow traders access to the NYSE or AMEX markets because

of costs associated with doing so. These firms prefer to trade only

Nasdaq stocks. The NYSE and the AMEX markets can be traded

using the Super DOT (Super Designated Order Turnaround) system.

This system allows traders to place orders that are routed to the

appropriate specialist or member brokerage post on the floor.

Super DOT usually carries smaller orders; however, this system is

responsible for over half the orders traded on the NYSE. To a great

extent, the Super DOT system enables program trading. Armed with

this information and using your imagination, you should see an

advantage that, with a little work, could give you an edge over other

traders who see only the obvious.

In my opinion, not being able to trade the NYSE and AMEX electronically

is a great disadvantage. When looking for an electronic

trading firm, make sure that it offers you the ability to route your

order through ECNs, SOES, and the Super DOT system. You want

flexibility in routing because this translates into an advantage over

those who do not have it. All three options (ECNs, SOES, Super

DOT) give you the power to route the trade appropriately.

The major difference in trading the NYSE versus the Nasdaq is

that the NYSE is an auction market, and specialists maintain and make orderly markets. They stand ready to provide liquidity. This is

a tall order given the size and volatility of the markets. To expedite

the process, the specialist is given latitude in decision making. A

good example of this, and one you can profit from, is when a specialist

has been given a very large order (size) to buy. If you have a

limit order or better order sitting in place to sell, you have a very

good chance of getting a higher price. If the specialist needs to buy

within a price range and does not have the time necessary to fill the

order in small blocks, you are the winner. The same would be true if

the specialist had a large order (size) to sell. If your buy limit order

is sitting at the right price in the book, you could be filled at a lower

price. I have had this happen to me numerous times, and I always

look at it as a bonus for trading the NYSE or AMEX markets. Getting

a better price on the buy and sell is known as price improvement.

The Pacific Stock Exchange, for example, prides itself on making an

orderly market and has an excellent record for price improvement.

Whenever I can, I let them, and other exchanges, help me as much

as possible.

Sometimes, traders who exclusively trade the Nasdaq electronically

exhibit some rather peculiar behavior. I particularly

enjoy one I call hyperdrive. After about three months of trading,

otherwise calm, relaxed individuals go through a transformation.

They seem to live in a reality where events are moving at the speed

of light, and they move right along with them. They are in a hurry

to get to wherever it is they are going, and once they get there, they

are in a hurry to leave. They talk fast, walk fast, and if you are moving

too slowly they will quickly let you know. One day at tradingschool.

com I was leading a training session on the Super DOT

system. In the class was a trader who had traded only the Nasdaq

and wanted to learn about Super DOT. A trader who is trading electronically

in most cases will be able to buy or sell in two seconds or

less, which includes the confirmation—very fast indeed. When you

use the Super DOT system, it could take 3 to 12 seconds, and in

rare cases longer. I would estimate that the average time for a trade

using the Super DOT is somewhere around three to six seconds. Mr.

Nasdaq clicked the buy button and the trade went in on Super DOT;

it took four seconds. Mr. Nasdaq's comment was, "Seems a little

slow to me." Fifteen minutes later I watched as he entered a buy

limit order, and this time it took seven seconds. As I watched him

during that seven seconds, his facial expressions would have led

you to think he was having some kind of seizure. He was in agony

waiting, and those five extra seconds seemed to him like an eternity.

When the trade posted on the real-time blotter, he gave a sigh

of relief that could be heard across the room. At the end of the day

he said, "How can you stand waiting that long?" I laughed and said,

"The trade took a total of only seven seconds and you had price

improvement on the trade. I think that is worth waiting for." If five

extra seconds drives you crazy with stress, maybe you shouldn't

be trading. Hyperdrive behavior is a symptom of emotional trading

that may lead to gambling behavior. A little stress is normal, but if

you become stressed over a five-second time period, you had better

take a look at your behavior. I will continue to use the Super

DOT system, enduring the extra five seconds and the possibility of

price improvement while laughing all the way to the bank. We will

look at a few examples of trading using the Super DOT system in

Chapter 6.

Trading the NYSE or AMEX using the Super DOT system can be

very profitable. The lack of volatility is made up by the stock's highprobability

behavior. Contrary to popular momentum dogma, a

stock with personality (a degree of predictable behavior) is far more

desirable than one with volatility. I would rather make several highprobability

trades than to roll the dice on Internet stocks and try to

hit home runs all the time. While Nasdaq stocks certainly have highprobability

trading opportunities, the NYSE is not typically a

hotbed of speculation. Mindless volatility should be avoided at all

costs because it usually does not translate into trend. If you think

for one minute that you are always going to be on the right side of

volatility, think again. Traders use a term known as the stick. The

stick is a price bar that could be intraday, daily, weekly, or monthly.

If you are one who seeks out the most volatile stocks without looking

at probability, you are going to take a beating with the volatility

stick, and I can assure you it is going to hurt. Do not trade the Nasdaq

or the NYSE unless your focus is high-probability trading.

You know about the various ECNs, SOES, and SelectNet. The question

you might be asking about now is, "Which one of these do I

route my order through." Three offer the speed and liquidity that

intraday traders and microtrend traders need.

1. Island (LSLD)

2. Small Order Execution System (SOES)

3. Archipelago (ARCA, TNTO, ARCHIP)

Super DOT: Trading with the Big Boys

Tremendous opportunity exists in trading large-cap stocks on the

New York Stock Exchange (NYSE). Most of the time, when you hear

the term electronic trading you think about using the ECNs and trading

the Nasdaq market. You can trade the NYSE electronically by

accessing the Super DOT system. If your electronic brokerage firm

has an affiliate-member relationship that enables it to route orders

to the floor, you can trade the NYSE electronically. If it does not, you

will not be able to trade the NYSE. In some cases, day trading firms

do not allow traders access to the NYSE or AMEX markets because

of costs associated with doing so. These firms prefer to trade only

Nasdaq stocks. The NYSE and the AMEX markets can be traded

using the Super DOT (Super Designated Order Turnaround) system.

This system allows traders to place orders that are routed to the

appropriate specialist or member brokerage post on the floor.

Super DOT usually carries smaller orders; however, this system is

responsible for over half the orders traded on the NYSE. To a great

extent, the Super DOT system enables program trading. Armed with

this information and using your imagination, you should see an

advantage that, with a little work, could give you an edge over other

traders who see only the obvious.

In my opinion, not being able to trade the NYSE and AMEX electronically

is a great disadvantage. When looking for an electronic

trading firm, make sure that it offers you the ability to route your

order through ECNs, SOES, and the Super DOT system. You want

flexibility in routing because this translates into an advantage over

those who do not have it. All three options (ECNs, SOES, Super

DOT) give you the power to route the trade appropriately.

The major difference in trading the NYSE versus the Nasdaq is

that the NYSE is an auction market, and specialists maintain and make orderly markets. They stand ready to provide liquidity. This is

a tall order given the size and volatility of the markets. To expedite

the process, the specialist is given latitude in decision making. A

good example of this, and one you can profit from, is when a specialist

has been given a very large order (size) to buy. If you have a

limit order or better order sitting in place to sell, you have a very

good chance of getting a higher price. If the specialist needs to buy

within a price range and does not have the time necessary to fill the

order in small blocks, you are the winner. The same would be true if

the specialist had a large order (size) to sell. If your buy limit order

is sitting at the right price in the book, you could be filled at a lower

price. I have had this happen to me numerous times, and I always

look at it as a bonus for trading the NYSE or AMEX markets. Getting

a better price on the buy and sell is known as price improvement.

The Pacific Stock Exchange, for example, prides itself on making an

orderly market and has an excellent record for price improvement.

Whenever I can, I let them, and other exchanges, help me as much

as possible.

Sometimes, traders who exclusively trade the Nasdaq electronically

exhibit some rather peculiar behavior. I particularly

enjoy one I call hyperdrive. After about three months of trading,

otherwise calm, relaxed individuals go through a transformation.

They seem to live in a reality where events are moving at the speed

of light, and they move right along with them. They are in a hurry

to get to wherever it is they are going, and once they get there, they

are in a hurry to leave. They talk fast, walk fast, and if you are moving

too slowly they will quickly let you know. One day at tradingschool.

com I was leading a training session on the Super DOT

system. In the class was a trader who had traded only the Nasdaq

and wanted to learn about Super DOT. A trader who is trading electronically

in most cases will be able to buy or sell in two seconds or

less, which includes the confirmation—very fast indeed. When you

use the Super DOT system, it could take 3 to 12 seconds, and in

rare cases longer. I would estimate that the average time for a trade

using the Super DOT is somewhere around three to six seconds. Mr.

Nasdaq clicked the buy button and the trade went in on Super DOT;

it took four seconds. Mr. Nasdaq's comment was, "Seems a little

slow to me." Fifteen minutes later I watched as he entered a buy

limit order, and this time it took seven seconds. As I watched him

during that seven seconds, his facial expressions would have led

you to think he was having some kind of seizure. He was in agony

waiting, and those five extra seconds seemed to him like an eternity.

When the trade posted on the real-time blotter, he gave a sigh

of relief that could be heard across the room. At the end of the day

he said, "How can you stand waiting that long?" I laughed and said,

"The trade took a total of only seven seconds and you had price

improvement on the trade. I think that is worth waiting for." If five

extra seconds drives you crazy with stress, maybe you shouldn't

be trading. Hyperdrive behavior is a symptom of emotional trading

that may lead to gambling behavior. A little stress is normal, but if

you become stressed over a five-second time period, you had better

take a look at your behavior. I will continue to use the Super

DOT system, enduring the extra five seconds and the possibility of

price improvement while laughing all the way to the bank. We will

look at a few examples of trading using the Super DOT system in

Chapter 6.

Trading the NYSE or AMEX using the Super DOT system can be

very profitable. The lack of volatility is made up by the stock's highprobability

behavior. Contrary to popular momentum dogma, a

stock with personality (a degree of predictable behavior) is far more

desirable than one with volatility. I would rather make several highprobability

trades than to roll the dice on Internet stocks and try to

hit home runs all the time. While Nasdaq stocks certainly have highprobability

trading opportunities, the NYSE is not typically a

hotbed of speculation. Mindless volatility should be avoided at all

costs because it usually does not translate into trend. If you think

for one minute that you are always going to be on the right side of

volatility, think again. Traders use a term known as the stick. The

stick is a price bar that could be intraday, daily, weekly, or monthly.

If you are one who seeks out the most volatile stocks without looking

at probability, you are going to take a beating with the volatility

stick, and I can assure you it is going to hurt. Do not trade the Nasdaq

or the NYSE unless your focus is high-probability trading.