Opening and Closing Strategies for Professional Day Traders

The recent changes in Market Mechanics that affect our trading strategies are of great interest to us, with the New York Stock Exchange's implementation of data distribution and Goldman Sachs' (GS | Quote | Chart | News | PowerRating) adoption of the RediPlus trading platform. It's a bit difficult to keep up with all these changes, so I rely on my friends at the NYSE and Goldman Sachs to keep me informed. The most noteworthy changes that started on July 1, 2008 were the modifications to the Pre-opening indicators (to include share imbalances), and the pro-active updates on the MOC imbalances. First, let's discuss strategies involving the openings and the market closing prints.

For decades now, we at Bright Trading have engaged in what we call the "Opening Only" trading strategy. It all started when I would receive, before the market opened, notifications that there were excess shares to buy or to sell in specific equity issues. We would then enter orders above and below the projected opening prices each day. Essentially, we looked for stocks that gapped way up or down, and then either bought them or sold them short.

For example, going back to the "good old days" - I was advised that there were 100,000 extra shares of company XYZ to buy (excess meaning over and above what could be matched up, price wise). This would mean that more stock is needed, and that the price will be going up. I would short sell 10,000 shares at $32.25 and another 10,000 at $32.50. I knew that the NYSE Specialist would be selling into this opening market as well, since he must accommodate these excesses, and he could not participate on the same side.

I wouldn't know how many shares I sold, if any, or what price, until the stock opened. Using the example above, and let's say the stock opened at $33.00, I would have been short 20,000 shares at $33.00. I always figured I would be in good company with the Specialist, and buy my shares back in a few minutes, with a very high likelihood of profits. We generally covered shares at a profit about 75% of the time, or more. This seemingly easy strategy carries a disclaimer - for those who think it's too good to be true - it takes a couple million dollars in buying power to engage in it, even though the risk is very low. Our traders have the advantage of using our capital for this strategy, while the small private investor might not have the same resources.

Fast forward to 2008. Our traders have been taught to engage in this same type of strategy, but by being pro-active instead of responding to requests. We start by calculating where we think the overall market will open based on Fair Value calculations, and where the e-minis are trading just prior to the opening at 9:30.

We generally envelope with buy orders and sell short on orders between 10 and 300 stocks apiece. We then enter about 20 million shares of "opening only" limit orders. Usually, we tend to get fills on between 5-20 percent of the orders, depending on how aggressive the individual traders might be that day.

To capture profits, we have programs that send in retrace orders, and some send in stop loss orders for those that may not retrace. I personally send an order to cover half the number of shares (generally between 2,000 and 4,000 on each stock) with about a 6-10 cent profit. I like to watch the market for a few minutes and gradually get out of the rest, based on market movements, peers, sectors, and other market indicators. In reality, we were flying blind in regards to the actual number of shares that would be involved in these opening orders.

Now the NYSE via our Goldman Sachs RediPlus trading platform, shows these imbalances. We can now modify share size and pricing, which should enhance our already good winning-percentages. We simply sort by size of the imbalance for our individual group of stocks.

Now for the end of day changes. As most of you are aware, the NYSE accepts "MOC" (Market on Close) orders all during the trading day. At 3:40 p.m. EST they publish the excess buys or sells to traders around the Country. They are simply looking for help in the form of offsetting trades. Here's what happens at 3:40 p.m. EST:

They no longer accept standard MOC orders unless the orders go against the published imbalance. This gives our traders a chance to respond to the imbalances on their individual stocks, and to get a feel for the overall sentiment of the market during the last 20 minutes. For example, if you bring up only the Dow Jones 30 stocks on the RediPlus platform, and you see 25 big sell imbalances, and no buy imbalances, you can be pretty certain the market will be heading down. For decades they would only republish the imbalance shares at 3:50 p.m. EST, after the offsetting orders have been placed. This might result in having lower share imbalances, none at all, or actually reversing from excess sells to excess buys.

If there are still imbalances at 3:50 p.m. EST, then traders can still send in offsetting orders as MOC's. We tend to trade a lot during the last 20 minutes of the day. The NYSE is now updating the actual imbalance shares every 15 seconds or so, which gives us a much better handle on how we want to trade those last 20 minutes of the day. Instead of "flying blind" for 10 minutes, or during the last 10 minutes, we will know approximately the actual size of the MOC imbalances.

On July 2, 2008 we got all of our traders together online for a discussion of these changes and how we are going to adapt. Modifications to automated spreadsheets are being done, and trader feedback is being evaluated by Management and our Mentoring groups.

I hope these changes will help your personal trading.

Don Bright is a Trader and Director of Education Bright Trading. Don writes a monthly column in Technical Analysis of Stocks and Commodities magazine, and has hosted "Stock trading with the Bright Brothers" radio show for 7 years (which is on hiatus ). Don brings some of the world's best traders to help teach his 3 Day Training Course and his 2- 4 week "Boot Camps."