0001
`
`IBG 1020
`CBM of U.S. Pat. No. 7,533,056
`
`

`
`the
`•
`strategi
`I
`•
`electronic
`I
`day
`trader
`
`0002
`
`

`
`WILEY ONLINE TRADING FOR A LIVING
`Electronic Day Trading to Win I Bob Baird and Craig McBurney
`The Strategic Electronic Day Trader I Robert Deel
`Day Trade Online I Christopher A. Farrell
`Trade Options Online I George A. Fontanills
`Electronic Day Trading 101 I Sunny J. Harris
`How I Trade for a Living I Gary Smith
`
`0003
`
`

`
`R E T EEL
`
`John Wiley & Sons, Inc.
`New York .. Chichester .. Weinheim .. Brisbane .. Singapore .. Toronto
`
`0004
`
`

`
`This book is printed on acid-free paper.<§
`Copyright © 2000 by Robert Deel. All rights reserved.
`
`Published by John Wiley & Sons, Inc.
`Published simultaneously in Canada.
`
`No part of this publication may be reproduced, stored in a retrieval system or transmit(cid:173)
`ted in any form or by any means, electronic, mechanical, photocopying, recording, scan(cid:173)
`ning or otherwise, except as permitted under Section 107 or 108 of the 1976 United
`States Copyright Act, without either the prior written permission of the Publisher, or
`authorization through payment of the appropriate per-copy fee to the Copyright Clear(cid:173)
`ance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-
`4 7 44. Requests to the Publisher for permission should be addressed to the Permissions
`Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212)
`850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM.
`
`This publication is designed to provide accurate and authoritative information in regard
`to the subject matter covered. It is sold with the understanding that the publisher is not
`engaged in rendering professional services. If professional advice or other expert assis(cid:173)
`tance is required, the services of a competent professional person should be sought.
`
`RealTick™ is a trademark of Townsend Analytics, Ltd.© 1986-1999 Townsend Analytics.
`Used with permission. Any unauthorized reproduction, alteration or use of RealTick™
`is strictly prohibited. Authorized use of RealTick™ by John Wiley & Sons does not con(cid:173)
`stitute an endorsement by Townsend Analytics of the information contained in The
`Strategic Electronic Day Trader. Townsend Analytics does not guarantee the accuracy
`of or warrant any representations made by The Strategic Electronic Day Trader of the
`truth or accuracy of any information written in The Strategic Electronic Day Trader.
`
`Library of Congress Cataloging-in-Publication Data:
`Deel, Robert.
`The strategic electronic day trader I Robert Deel.
`p.
`em.
`Includes index.
`ISBN 0-471-25488-6 (cloth: alk. paper)
`1. Day trading (Securities). 2. Electronic trading of securities. 3. Stocks(cid:173)
`Data processing.
`I. Title.
`
`HG4515.95.D428 2000
`332.64'0285-dc21
`
`Printed in the United States of America.
`
`10 9 8 7 6 5 4 3 2 1
`
`99-055629
`
`0005
`
`

`
`contents
`
`chapter 'I
`the dream and the reality
`
`'I
`
`1
`The Dream
`The Reality of the Awakening
`Living the Dream
`4
`Which Dream Is Right for You?
`
`2
`
`8
`
`chapter 2
`electronic trading
`
`9
`
`11
`
`23
`
`10
`Electronic Trading for a Living
`Electronic Communications Networks (ECNs)
`Meet the ECNs
`12
`Small Order Execution System (SOES)
`Nasdaq Routing
`19
`Super DOT: Trading with the Big Boys
`Nasdaq Market Makers
`23
`Institutional Market Makers
`Nasdaq Level II Screens
`26
`Order-Routing System
`27
`
`17
`
`20
`
`0006
`
`

`
`vi
`
`contents
`
`chapter 3
`trading strategies
`
`35
`
`35
`The Magic Numbers
`37
`The Optimum Maximum Numbers
`39
`The Optimum Potential Number
`The Mathematics of Trading and Commissions
`Markets and Direction
`43
`Momentum Probability, Profitability Filter
`Trading the Basket and the Sectors
`57
`The Most Actives
`61
`The 20 Most Valuable Stocks
`Trading Closed-End Funds
`Twenty-five Old Friends
`Selecting a Strategy
`71
`
`62
`62
`70
`
`46
`
`40
`
`chapter 4
`a picture is worth a thousand words
`
`73
`
`75
`The Aura of Volatility
`High-Probability, Profitability Intraday Chart Patterns
`Bullish Chart Patterns
`80
`Bearish Chart Patterns
`89
`
`80
`
`chapter 5
`high-probability shorting
`
`95
`
`96
`How Shorting Works
`Hedging, Arbitrage, Hedge Funds, and You
`High-Probability Shorting Methodology
`Shorting Overbought Stocks
`104
`Microanalysis
`124
`129
`Microtrend Bearish Patterns
`Shorting Long-Term Bearish Trends
`
`132
`
`98
`103
`
`0007
`
`

`
`contents
`
`vii
`
`chapter 6
`electronic trading tactics
`
`137
`
`138
`One If by Land, Two If by Sea
`Time Cycle Correlation and Trading
`Intraday Charts and Tactics
`141
`Trading the Super DOT
`153
`Order-Routing Tactics Using Level II Information
`Intraday Trading Tactics
`159
`
`139
`
`156
`
`chapter 7
`the biomechanical trader
`
`165
`
`165
`The Hunter
`The Science of Biology and Trading
`Biological Time and Trading
`169
`Psychological Factors and Personality
`Creating the Biomechanical Trader
`Deel Mental Conditioning
`194
`The New Biomechanical Trader
`
`168
`
`178
`186
`
`197
`
`chapter 8
`seize the day
`
`199
`
`Not Even on a Silver Platter
`Your Trading Room
`201
`Work Area
`202
`tradingschool.com
`
`207
`
`200
`
`index
`
`209
`
`0008
`
`

`
`t e
`strategic
`I
`electronic
`
`
`0009
`
`0009
`
`

`
`chapter 1
`
`t
`
`r m
`
`d th r alit
`
`The Dream
`
`Each of us has a dream. For the active student of the market there is
`only one: to pit his or her ability and capital against the market and
`earn a living from it.
`For years Bill had dreamed of trading and living his dream. At
`age 33, he sold his printing business, making a $180,000 after-tax
`profit. This capital would enable him to begin living the dream, or so
`he thought. Four months after beginning to trade at a local elec(cid:173)
`tronic trading firm, Bill had lost $65,000; 63.89 percent of his trading
`capital had disappeared. What had taken him years to earn was
`gone. Bill's dream was rapidly becoming a nightmare.
`The grim reality is that short-term trading-especially day
`trading-can be hazardous to your wealth and that 92 percent of
`day traders lose money in their first two years of trading. Only 8
`percent are successful. Of that 8 percent, only 2 percent of the day
`trading public make money on a consistent basis. Why is it that the
`public gravitates toward short-term trading? There are several
`answers to this question. For now, let us address a more obvious
`
`0010
`
`

`
`2
`
`the strategic electronic day trader
`
`question. Why do 92 percent of day traders fail, and what makes 8
`percent successful? This book answers the questions and miscon(cid:173)
`ceptions about short-term trading. It delivers powerful trading
`methodology, screening procedures, tactics, and a revolutionary
`approach to developing emotional control and mental focus.
`
`The Reality of the Awakening
`
`Fortunately, Bill woke up from his nightmare and began to ask him(cid:173)
`self some profound questions. Realizing that the problem was one of
`his own creation, he took responsibility for his dilemma. Bill began
`to seek the answers he needed, which ultimately led him to trad(cid:173)
`ingschool.com. After I spoke with him, it became obvious that Bill
`had fallen into the "traders trap." The following is the essence of our
`conversation, which in turn led Bill to escape from the trap he had
`created for himself.
`We go to school, gain an education, become employed, or start
`our own business. We learn what we need to know to be successful,
`but nothing in our education or work experience provides the com(cid:173)
`prehensive knowledge or psychological control necessary for suc(cid:173)
`cess as a trader. Bill was intelligent, he owned his own business, and
`he was successful. He had the money he needed to begin his dream
`and some experience in the stock market. Bill was the very defini(cid:173)
`tion of a winner, so why had he lost 63.89 percent of his capital in
`four months?
`Unfortunately, it's human nature to assume that if we succeed
`in one area we will automatically succeed in another. The drive and
`determination that helped you succeed becomes the little voice in
`your head that says, "Trading and the concepts behind it seem sim(cid:173)
`ple enough to me. This can't be as difficult as starting and develop(cid:173)
`ing my own business. After that experience, I can do anything."
`Unfortunately, most people who enter the market with the idea of
`becoming traders have a feeling of invincibility, superiority, and no
`clue of what they are about to experience.
`Bill had a college education and years of experience in the
`printing business before he started his own business. Even with his
`education and experience, Bill told me that it had been difficult, but
`
`0011
`
`

`
`the dream and the reality
`
`3
`
`he prevailed and became successful. With this information as back(cid:173)
`ground, I asked Bill a few questions. Put yourself in Bill's place and
`answer the following questions:
`
`1. Would you buy a business if you had no idea what the cash
`flow would be?
`2. Would you buy a business if you had little actual experi(cid:173)
`ence or training compared to your competition?
`3. Would you buy a business if your competition were well
`capitalized and you had limited operating capital?
`4. Last, but certainly not least, would you buy a business
`without a business plan?
`
`If you are saying, "Not a chance," guess again. That is exactly what
`you are doing when you start trading for the first time. You must
`prepare yourself and realize that as a short-term trader you are up
`against the best traders in the world.
`Training, experience, psychological control, and a realization
`that you are not invincible or smarter than the market will lead to
`success. Each morning before you begin to trade, say the following:
`"My name is (your name). I can and may lose money today, but if I
`trade the plan and follow the rules I will be a winner." I repeat this
`little saying every morning before beginning to trade. It accom(cid:173)
`plishes two things. First, it is humbling to acknowledge that the
`market is all powerful and can take money from you at any time.
`Nothing will cause you to lose money faster than a big ego or trying
`to exact revenge on the market. If you are trying to prove you are
`right all the time, you are going to lose. When you do lose, are you
`going to get even with the market by showing it who's boss in the
`next trade? Thirty minutes later you have four consecutive losses
`and you are still blaming the market. Another trap is trying to set a
`dollar amount per month or per year that you want to earn from the
`market. Some use a percentage-for example, they may want to
`earn a return of 20 percent a month. Most novice traders look at
`trading as an escape from a job they hate, and they know they have
`to make X amount of money to pay the bills. You don't need the
`
`0012
`
`

`
`4
`
`the strategic electronic day trader
`
`added pressure of a monetary figure hanging over your head. This
`can become a psychological guillotine. If you don't meet your goal,
`you will push your trading beyond your skill, and the result will be
`a series of losses. Losing emotional control will result in large, un(cid:173)
`controlled losses. If you follow your trading plan, success should be
`the result. By focusing on your trading plan, emotion, ego, and mak(cid:173)
`ing money are no longer an issue. If you follow your trading plan,
`you are a winner regardless of the monetary outcome. Knowing
`yourself and adopting the right mind-set, trading strategy, and
`methodology before you start trading will enable you to avoid the
`traders trap and begin living the dream.
`
`living the Dream
`
`Dreaming the dream and living it are two different things. One is
`based on fantasy and the other on reality. To live the dream, you
`have come to the realization that short trading is like nothing you
`have ever experienced. The reality is that short-term trading is going
`to be one of the hardest things you have ever done, and without the
`proper training and psychological preparation, your stress level will
`most likely be off the scale. Mental training and conditioning will be
`discussed later in Chapter 7.
`Living the dream successfully depends to a great extent on
`you-and what kind of short-term trader you are. Identifying what
`kind of short-term trader you are is critical to your entire trading
`plan. I have trained over 4,000 individual traders from all over the
`world. This group includes professional traders, hedge fund man(cid:173)
`agers, mutual fund managers, and the general public. The first two
`questions I ask are as follows:
`
`I. What kind of predator are you?
`2. What is your time frame?
`
`These questions have an important interrelationship. What kind of
`predator are you? Knowing what kind of predator you are is very
`important because the market is a food chain. In this food chain,
`various predators are waiting to ambush you and devour your cap-
`
`0013
`
`

`
`the dream and the reality
`
`5
`
`ital. In order to develop the appropriate strategy, you must know
`your enemies and how they think.
`Short-term trading is divided into three different styles: day
`trading, microtrend trading, and position trend trading. One reason
`that short-term traders have such a high percentage of losses is that
`they are trained to use a standard one-size-fits-all approach. Usually,
`the entire focus of this approach is to follow short-term momentum
`and order flow represented by the ticker. This type of trading is
`referred to as scalping. There are two fundamental problems with
`this approach. First, time and sales are usually late, which no one
`addresses, and second, individuals are not all the same. Your trad(cid:173)
`ing strategy needs to be tailored to your trading ability. What works
`for someone else won't necessarily work for you. Another reason
`for failure is that short-term traders, especially day traders, aren't
`usually trained to screen for high-probability, high-profitability
`trades. I am going to introduce you to seven short-term trading
`strategies that are extremely successful. With seven strategies to
`choose from, it is up to you to select those that fit your needs and
`apply them. This leads us back to my first question. What kind of
`predator are you? You have to determine what kind of trader you
`are. Let's define the three types of short-term traders so that we all
`understand specifically what we are talking about.
`
`1. Day trader: A day trader by our definition is a trader who enters
`the market at some point during the day and is totally in cash (flat)
`by the end of the day. At no time does a day trader carry a position
`overnight. Some day traders trade for fractions of a point-usually
`Yl'6, Ys. This is called scalping. This type of day trading has a high fail(cid:173)
`ure rate. One out of a hundred thousand people can consistently
`make money by scalping. You always hear about the exceptions,
`don't you? The small profit per trade, commissions, slippage, and
`the possibility of a series of losing trades, make scalping a tech(cid:173)
`nique that may not be for you. You may be the exception, but don't
`lose all your money trying to prove it. Not all day traders are
`scalpers. For example, intraday trend traders will stay in a trade until
`the trend reverses. This could take a few minutes or several hours.
`Both types of day traders typically buy 500 to a 1,000 shares or
`
`0014
`
`

`
`the strategic electronic day trader
`
`more at a time and must be highly capitalized. The minimum day
`trading capital for an individual trader is usually $50,000 to
`$100,000. Day trading requires large amounts of operating capital.
`Most day traders trade several times a day. It's not unusual for a
`scalper to make 30 to 150 trades or more per day, while the intraday
`trend traders will make 3 to 9 trades per day.
`2. \\ Microtrend trader/ 'A microtrend trader by our definition is a
`trader who takes a position with the intention of holding it for three
`to five days. The microtrend trader is attempting to trade a small
`part of a larger trend. A day trader never carries a position
`overnight, but the microtrend trader does. Usually a stop is strate(cid:173)
`gically placed at the end of day to take the trader out if the trend
`dramatically reverses. For microtrend trading to be successful the
`entry must be made when the trend is strong. This usually occurs
`when the trend is under way or begins explosively. The momentum
`should carry the price for three to five days. Unlike the day trader
`who trades for fractions, the microtrend trader typically trades for
`points. After three to five days, the microtrend trader liquidates his
`or her position and looks for another microtrend. The minimum
`trading capital for an individual microtrend trader is usually
`$30,000. Most microtrend traders are very well capitalized, with
`trading accounts of $100,000 or more. The psychological stress on
`the microtrend trader is, in most cases, far less than on a day trader,
`because time is more an ally than an enemy.
`3.\\ Position trend trader: 1'A position trader attempts to ride the
`trend for 10 to 14 days or longer. A position trader usually takes a
`position of size (large number of shares) and holds until another
`position becomes more promising. If a trend is intact, the position
`trader will roll up stops until the market takes them out. The inten(cid:173)
`tion is to stay in the position for 10 to 14 days, but if the trend con(cid:173)
`tinues, the position trader will stay with the trend as long as
`possible. In many cases, a microtrend trader can become a position
`trend trader if the three- to five-day holding-period trend explodes,
`carrying prices further. Because position traders are in a trade for a
`longer period of time, they must allow for price volatility and intel(cid:173)
`ligent stop placement. The minimum trading capital for a position
`
`0015
`
`

`
`the dream and the reality
`
`7
`
`trader varies. If you hold a position beyond one month, you are con(cid:173)
`sidered an investor. According to this definition, most fund man(cid:173)
`agers are position traders. In many cases, institutional position
`traders will add to their positions if they feel the long-term outlook
`for the stock is positive. Position traders usually move the market
`because of the collective size of their accumulation (buying) or dis(cid:173)
`tribution (selling).
`
`What is your time frame? It should become obvious that
`understanding your time frame is critical to everything you do in
`trading. Your trading strategy, application of technical indicators,
`entry and exit, and so on, are determined by your individual time
`frame. As a professional who trains individuals to trade, one of the
`most amazing things I hear when I ask "What is your time frame?"
`is "I don't know." The very definition of what kind of trader you are
`is dependent on your concept of time as it relates to trading. Time
`can be your friend or your enemy, and nothing makes the case
`clearer than day trading. Each tick in real time, positive or nega(cid:173)
`tive, amplifies stresses that exist in your mind. Everything is mag(cid:173)
`nified, and each moment becomes urgent. Decisions have to be
`made on a second-by-second basis, and as each second passes,
`another agonizing decision to buy, sell, or hold must be made. At
`the end of the day, you feel as though you just completed a mara(cid:173)
`thon. Mentally and physically exhausted, you know that tomorrow
`you must run this marathon again. Obviously, not everyone will
`succeed as a day trader. This is proven by the failure rate of indi(cid:173)
`viduals who attempt to day trade. Many would-be day traders fail
`because the wrong trading strategy and methodology causes them
`to overtrade. Many day traders are, in fact, gamblers and can't stop
`trading. Success in day trading will come when you learn to effec(cid:173)
`tively slow down time. This is accomplished by making fewer
`trades and selecting those with a higher probability of success and
`a positive reward-to-risk ratio. In Chapter 3 you will be introduced
`to various trading strategies. These strategies put time on your
`. side making it far less likely that you will become a market statistic.
`. Before you begin to trade with real money, you absolutely need to
`('
`\\ define your time frame. J J /
`
`0016
`
`

`
`the strategic electronic day trader
`
`Which Dream Is Right for You?
`
`Are you a day trader, a microtrend trader, or a position trader? Ulti(cid:173)
`mately, you have to make the decision. Don't let your decision be
`influenced by greed or the input of others. Your decision should be
`based on your individual psychology, knowledge, trading capital,
`and so on. Bill began living his dream when he realized that scalping
`was not for him. Today Bill is very successful as a microtrend trader
`and position trader and is making a very comfortable living from
`trading. Some individuals have the psychological makeup neces(cid:173)
`sary to be successful as day traders, while others will be more suc(cid:173)
`cessful as position traders or microtrend traders. Remember the
`old saying, "If the shoe fits wear it," and be aware that one size does
`not fit all.
`In the following chapters, I am going to guide you to new aware(cid:173)
`ness and knowledge. Within these pages, many of you will find the
`answers you need to improve your short-term trading.
`
`0017
`
`

`
`cha ter
`
`le tr
`
`ic tr di
`
`The term online trading is often misused and abused by the media,
`professionals, and the public to refer to electronic trading. Let me
`make this perfectly clear once and for all. Trading online over the
`Internet and sending orders to an online broker do not constitute
`electronic trading. The two are as different as night and day. If you
`are trading online, before you can key in your buy or sell order, the
`electronic trader has already made the trade and received confir(cid:173)
`mation:' Electronic traders route their buy and sell orders through
`Electronic Communications Networks (ECNs).1'rhe watchword of
`the electronic trader is speed, and speed is something you do not
`have onlinePOnline trading is for investors, not for traders, and for
`this reason, do not even attempt to day trade online.'Online trading
`was not designed, nor was it ever intended, for day trading. Day
`trading online is hazardous to your wealth. Let me walk you through
`a typical online trading experience.
`You opened your new online trading account a week ago and
`you decide that today you will begin trading online. You turn on
`your computer, and after the third attempt, you establish a good
`Internet connection. As the data fills your screen you feel power,
`
`0018
`
`

`
`1 0
`
`the strategic electronic day trader
`
`excitement, and anticipation. Like a modern-day land shark you
`look for a trading opportunity. As you look at your charts you spot
`a possible trade. With the click of your mouse you bring up your
`order screen. You type in the price, the number of shares you want
`to buy, and identify your order as a limit order by checking the box.
`You are just about to hit the order button when you see the price
`change. Do you change the limit order to a market order? All the
`while time is ticking by. Finally, you decide to send a limit order, but
`you have to change the price. You do this and hit the Buy button.
`This cumbersome process took you over 15 seconds. Now that the
`order has been sent, it will take another 10 seconds for the online
`broker to receive and act on it. Two minutes later you see your price
`trade across the screen. Your confirmations arrive by e-mail or by
`phone. You wait and wait and wait, only to find out 20 minutes later
`that your order remains unfilled due to fast market conditions. Feel(cid:173)
`ing frustrated and less empowered than 30 minutes ago, you vow to
`give it another try. As you watch your screen, another opportunity
`shows itself, and this time you send it as a market order. Two sec(cid:173)
`onds after you hit the Buy button the stock runs up. Online traders
`do not have the ability to cancel their orders in seconds, with
`almost instant confirmation, as electronic traders do. Fifteen min(cid:173)
`utes later you receive an e-mail informing you that you bought the
`stock at % of a point higher than when you entered the order, and
`you decide to sell. You quickly enter another market order, only to
`find out your order was filled J4' point lower. That afternoon the mail
`arrives with your new account information, and the front of the
`envelope says it all: "Welcome to Online Trading."
`This example is not an exaggeration. Online trading lacks the
`speed and technical sophistication necessary to successfully trade
`intraday. It is possible to microtrend trade or invest online-but not
`to day trade. Day trading is difficult enough as it is without handi(cid:173)
`capping yourself by trying to trade online.
`
`Electronic Trading for a living
`I am a professional trader. By that I mean that I make my living trad(cid:173)
`ing and training other professionals and individuals to trade the
`
`0019
`
`

`
`electronic trading
`
`11
`
`market. People pay me to help improve their trading skills. If I am
`successful and improve their ability by a small degree, it could
`translate into hundreds of thousands of dollars for them. I have
`found that part of successful trading is knowing the difference
`between tools and toys and paying the price for professional results.
`Let me explain what I mean with a story.
`I was in my father's garage returning tools I had borrowed. My
`father asked me if the tools had been right for the job. I replied,
`"Yes, they were." He then asked me, "Did you take care of my tools?"
`Before I could answer, he proceeded to tell me a story, as Texans
`often do. He said, "When I was young I worked for a man who had a
`landscaping company. I had just returned from doing a job and was
`putting away the tools when he asked me, 'Did you take care of my
`tools?' " Dad said yes. The man said, "I make my living with these
`tools. Always remember, if you take care of your tools, your tools
`will take care of you. They make the work I do easier and are worth
`the price because the best is never cheap. Never buy a toy unless
`you just want to play." Successful traders use the best tools money
`can buy because toys will not get professional results. Remember,
`your competition does not use toys. They play the serious game of
`taking other people's money: It's called trading.
`Computerized electronic trading puts you on a level with the
`professionals. When your order is entered, it is treated just as an
`order from any major firm. Using this sophisticated technology
`combined with self-discipline, knowledge, experience, and skill, you
`have an opportunity to succeed where many others fail. Part of
`your success will come from an understanding of the various seg(cid:173)
`ments that make electronic trading unique to online trading.
`
`Electronic Communications Networks (ECNs)
`
`What are Electronic Communications Networks (ECNs)? Electronic
`Communications Networks are conduits over which you announce
`your intentions to buy or sell a stock. Your orders are matched with
`other orders from individuals like yourself. ECNs add liquidity to
`the National Association of Securities Dealers Automated Quota(cid:173)
`tions (Nasdaq) system without the involvement of a market maker.
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`12
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`the strategic electronic day trader
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`Market makers make their money by creating a spread on each
`trade. By placing your order on an ECN, in most cases you bypass
`the spread, because most ECNs do not sell their order flow. I think
`of ECNs as an electronic dating service for stocks, matching willing
`buyers with willing sellers.
`The broker-dealers subscribe to the ECNs and pay a fee to facil(cid:173)
`itate the trade. ECNs must be registered with the Nasdaq to partici(cid:173)
`pate in the market. The ECN system brings additional customer
`orders into the Nasdaq market. Both customer orders and market
`makers post their orders on ECNs to achieve a more liquid market.
`Electronic trading has been credited with narrowing the spread on
`most stocks traded on the Nasdaq market~ 'An advantage of elec(cid:173)
`tronic trading that is not available to the online trader is the ability
`to buy on the bid and sell on the ask. Most of the time an online
`trader sees only the national best bid or offer (NBBO). The elec(cid:173)
`tronic trader often splits the bid and offer, thereby narrowing the
`spread on the stock. Electronic trading tactics will be covered in
`Chapter 6. If
`The first ECN, known as Instinet, came into existence in 1969.
`For many years Instinet-owned Reuters was the only ECN around.
`Today nine ECNs exist and several more are planned for the future.
`Before I address the different ECNs, I think it is important to note
`the effect ECNs have had on the New York Stock Exchange (NYSE).
`Proposed extended trading hours for the NYSE have been the result
`of pressure put on NYSE by the ECNs. After-hours trading, using
`ECNs, is forcing the NYSE to make changes in the old way of doing
`business. In my opinion, the ECNs will bring about 24-hour trading.
`Not long after that will come global electronic trading for individu(cid:173)
`als who wish to trade international markets.
`
`Meet the ECNs
`
`As I write this book, there are nine ECNs that are active on a Nasdaq
`Level II screen. Each ECN is identified by its specific symbol, as are
`the market makers. Fidelity, Schwab, Donaldson, Lufkin & Jenrette,
`and Spear, Leeds & Kellogg plan to introduce yet another ECN in late
`1999. This ECN could serve as the first after-hours trading platform
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`0021
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`electronic trading
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`13
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`with substantial liquidity that is accessible to the retail public.
`Charles Schwab's customer survey indicates that 40 percent of cus(cid:173)
`tomers who currently give Schwab after-hour orders will trade
`extended hours. This system will offer the client the ability to trade
`NYSE stocks as well as stocks traded on the Nasdaq. As you can see,
`the ECNs are going to bring about more change in the next five years
`than has transpired in the past hundred years. Even the way the
`industry does business will be forever altered. Let me briefly intro(cid:173)
`duce you to the current ECNs.
`
`lnstinet (INCA)
`The ECN Instinet was originally designed to make markets between
`institutions. Today you can access the Instinet ECN if your broker
`dealer has an arrangement allowing you to do so. Not all electronic
`trading firms are created equal. You will find that some firms do not
`allow you to use certain ECNs; this is a business decision of each
`particular firm. Instinet allows you to trade 45 minutes before and
`after NYSE hours. Instinet is not considered a retail ECN, as most of
`its activity is institutional trading.
`
`Island (ISLD)
`Island is the most liquid of the retail ECNs. Island has had days
`when trading volume was greater than on Instinet. This is partly due
`to the fact the institutional traders were hiding orders on Island and
`did not want to post them on Instinet. In this way they can mask
`their size (number of shares) and intentions. Like most ECNs, Island
`is new, coming into existence in 1996. In a small amount of time it
`has become one of the most active ECNs. Island allows you to enter
`only limit orders, and because you can not specify all-or-none
`orders, you may receive a partial fill. For example, you wanted to
`selll,OOO shares but were filled with only 500. Island will many times
`fill you in odd lots (uneven number of shares). To avoid a partial fill,
`make sure that your order reflects the size (number of shares)
`posted at the bid and ask on the Level II screen. These posted bids
`and offers (ask) represent the best bids and offers and are posted
`on the Nasdaq Level II screen. When you route an order to ISLD, it is
`posted into what is called the Island book. This book lists all buy
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`the strategic electronic day trader
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`and sell orders. Any buy or sell orders that arrive simultaneously
`and are the same price are executed instantly. If you place a buy or
`sell order on Island and currently there is no market at your price,
`the order will sit on the book until it can be matched with another
`order. Whenever you see an Island order posted on the Level II
`screen, you are trading against another Island trader. Island will be
`one of the most used and liquid ECNs. Island has extended its trad(cid:173)
`ing hours in preparation for 24-hour trading.
`
`Archipelago (ARCA, TNTO, ARCHIP)
`Many electronic day trading firms do not have access to ECN Archi(cid:173)
`pelago. As is the case with all ECNs, the broker-dealer must sub(cid:173)
`scribe. In some cases, these broker-dea