I have spent the majority of the last twenty
years in the business as a NASDAQ market maker and before that as a buy side
trader for a large group of mutual funds. The bulk of my trading experience is
from a different perspective than a lot of you have probably seen. As a buy side
trader I was working orders you were trying to sniff out and as a market maker I
was probably on the other side of many of your trades (for better or worse). In
writing for TradingMarkets, I would
like to share with you some of my experiences from the heat of the battle with
money and emotions on the line.
As a market maker you have the luxury of knowing where the buyers and sellers
live in a select group of stocks and the ability to interact with order flow
throughout the course of the trading day. You have the knowledge of your
customer’s prior activity at various price levels and indications of interest at
different price points. You also see who the buyers and sellers are. Not all
buyers and sellers are created equal. There are those customers you never want
to take the other side of a trade with and will want to follow for direction.
Back in the bubble days it wasn’t fun having a bad short in some $200 stock only
to have one of these guys walk in the door as a buyer but at least you knew it
was time to go buy some stock. On the flip side of that was being long when such
a buyer surfaced. There is nothing like order flow to help guide you through the
day. When trading without the benefit of order flow tape reading skills and
market feel become more important. When something is setting up at an important
level keep your eyes out for volume along with some size coming in on both sides
of the market and what happens when it does. There is usually something
happening to help lead you in the right direction whether it be volume or simply
the appearance of buyers or sellers on the screen. Take a look at a recent
example of a 2 dollar number.
Capstone Turbine (CPST | Quote | Chart | News | PowerRating) broke out above resistance on 8/1. There were clues
before this happened. Volume was picking up with bids showing at various levels.
When the sellers took out the bids even more bids entered the market and by days
end this stock was off to the races.
With the improvement in technology and ECNs getting so much of the volume it has
become much more difficult to track some of the bigger market makers but keep an
eye on which ECNs are involved. Some of the big boys use the same machine with
the same buy or sell amount every time they enter an order.
In addition to tape reading which is an available option for all proprietary
traders you can find additional ways to give yourself an edge unavailable to
most. A prime example would be a model driven system to help create an edge much
like order flow created the edge I had for many years as a market maker. The
Connors Research Group has some great statistically backed strategies which will
put you in a trade while knowing in advance what you will do depending on the
circumstances surrounding the trade. Of course this can only give you a
statistical edge, if there is a big order out there on the other side, you lose
but you have the confidence of trading with probability on your side. It happens
but as long as you are prepared it’s no problem, move on the next trade. There
are many opportunities out there to be taken advantage of.
Like I said earlier I have been sitting on trading desks for majority of the
last 20 years so my writing skills might need a little work. I look forward to
sharing my trading insights with you.
