Trading the Super DOT
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Your Level II screen will show you the bid and ask prices of stock on
the various exchanges. Remember that price improvement is possible
on the NYSE because of the specialist involvement in the trade.
If volume is good and the spread is wide, you can come in and buy
on the bid and sell on the ask. For example, if the price is 79/ on the
bid and 79 1/2 on the ask, you place a limit order to buy on the bid at
79 1/4. There is size (number of shares) on the bid, so you do not have
to worry about your limit order. If you get filled and there is enough
size on the ask, you can turn around and offer the stock out at $79 1/2.
Selling 1,000 shares, you pocket the spread minus the commission.
Wide spreads do not always occur, so you have to be ready to act
very quickly. If the ask price drops, you have to hit the Cancel button
to cancel the trade. You could also buy high, becoming at that
moment the best bid in the country. Once you are filled, you offer
the stock out at the higher price. You would do this if you felt very
certain that the ask price was going to move higher. I trade this way
less than 5 percent of the time simply because I find trading intraday
trends to be much more profitable and less risky. Figure 6.11
shows a Level II screen of the NYSE and the example just described.
In Figure 6.11, you see the routing set for ISI. This will route the
trade to the Super DOT system. This system is not as fast as using
and ECNs or SOES. An order will typically take from 3 to 6 seconds
to be filled and in some cases up to 12 seconds. This is critical to
remember because when you cancel a trade the electronic pulse
may not get to the floor before your trade is filled. For this reason,
you need to be very aware of the trend strength of the stock and
the size on both the bid and the ask. As you see from this example,
you are offering out stock at $79 1/2 and capturing the spread.
One of the advantages of the setting speed is the potential for
price improvement when you buy and sell stocks on the NYSE. I estimate
that I get price improvement on limit orders 30 percent of the
time. Another advantage of the Super DOT system is that it is very
simple to use. If you are routing an order to the Nasdaq, you do not
know if a market maker or an ECN is going to be at the bid or the ask.
With the Super DOT you just buy or sell from a single screen with out having to set up a second screen. This simplicity makes the initial
trade on the Super DOT very fast. After the number of shares is
entered, then it is simply a matter of clicking the mouse on the buy
or sell button. Nasdaq Level II order routing is not that simple for
the reasons I described. I will show you a trick for fast order routing
on the Nasdaq. This trick demonstrates the necessity for a multimonitor
system. I suggest three or four monitors—two would be the
absolute minimum.
Your Level II screen will show you the bid and ask prices of stock on
the various exchanges. Remember that price improvement is possible
on the NYSE because of the specialist involvement in the trade.
If volume is good and the spread is wide, you can come in and buy
on the bid and sell on the ask. For example, if the price is 79/ on the
bid and 79 1/2 on the ask, you place a limit order to buy on the bid at
79 1/4. There is size (number of shares) on the bid, so you do not have
to worry about your limit order. If you get filled and there is enough
size on the ask, you can turn around and offer the stock out at $79 1/2.
Selling 1,000 shares, you pocket the spread minus the commission.
Wide spreads do not always occur, so you have to be ready to act
very quickly. If the ask price drops, you have to hit the Cancel button
to cancel the trade. You could also buy high, becoming at that
moment the best bid in the country. Once you are filled, you offer
the stock out at the higher price. You would do this if you felt very
certain that the ask price was going to move higher. I trade this way
less than 5 percent of the time simply because I find trading intraday
trends to be much more profitable and less risky. Figure 6.11
shows a Level II screen of the NYSE and the example just described.
In Figure 6.11, you see the routing set for ISI. This will route the
trade to the Super DOT system. This system is not as fast as using
and ECNs or SOES. An order will typically take from 3 to 6 seconds
to be filled and in some cases up to 12 seconds. This is critical to
remember because when you cancel a trade the electronic pulse
may not get to the floor before your trade is filled. For this reason,
you need to be very aware of the trend strength of the stock and
the size on both the bid and the ask. As you see from this example,
you are offering out stock at $79 1/2 and capturing the spread.
One of the advantages of the setting speed is the potential for
price improvement when you buy and sell stocks on the NYSE. I estimate
that I get price improvement on limit orders 30 percent of the
time. Another advantage of the Super DOT system is that it is very
simple to use. If you are routing an order to the Nasdaq, you do not
know if a market maker or an ECN is going to be at the bid or the ask.
With the Super DOT you just buy or sell from a single screen with out having to set up a second screen. This simplicity makes the initial
trade on the Super DOT very fast. After the number of shares is
entered, then it is simply a matter of clicking the mouse on the buy
or sell button. Nasdaq Level II order routing is not that simple for
the reasons I described. I will show you a trick for fast order routing
on the Nasdaq. This trick demonstrates the necessity for a multimonitor
system. I suggest three or four monitors—two would be the
absolute minimum.