Brokers & My Sanity!

[BBB]

Hi folks,

I was hoping my learned friends and chums of T2W could help me with something that I can't get off my chest (for the last few days)...

As most probably know, US brokerages who deal in NASDAQ stocks receive payment from market makers (especially Knight) for the brokers order flow. In other words, Knight will pay a broker to execute their order flow. This means they know where the orders are, gun for them etc...

From my own experiences on a derivatives trading floor, I knew several jobbers (local brokers who also traded their own account) who would give their own orders priority over their customers orders - so they could fade their customers (illegal yes, improbable - NO!)

My rub is this:

A/Does anyone know of regulations that allow US futures brokers to receive payment from market makers for their order books - especially on the GLOBEX/eCBOT platforms????

B/ If so, it would seem down right stupid to enter a stop loss order close to the market, and a mental stop/ market order should be used at all times!

 

[Trader333]

BBB,

Interesting about the favouring of certain MM over others. I use IB and if your are using SMART to execute orders then most of the time it is Island that you get transacted with.

There are times when I will use specific orders such as supersoes which means that I transact with a MM but I have always got filled at a good price so it has not been of concern to me.

Personally I do not put stop orders in unless I have to leave my pc, so I tend to use mental stops and have found this to be more effective than putting in stop orders which always get transacted against too late for my liking.


Paul

 

[BBB]

Thanks Paul. Direct access/specifying your destination is one way round the issue with NASDAQ. Doesn't Island only accept limit orders though? (I may be wrong)

I guess my question is mostly of issue to position traders and futures traders who are not directing their orders to specific participants.

 

[Dow Dog]

Personally I do not put stop orders in unless I have to leave my pc, so I tend to use mental stops and have found this to be more effective than putting in stop orders which always get transacted against too late for my liking.

I use this approach Paul. Just wondering what you consider to be an effective stop level on NASDAQ stocks. 50 cents ?

 

[BBB]

Surely that would depend on the volatility of the instrument at that time, rather than a fixed, rigid amount for all trades??

 

[Dow Dog]

I tend to use 30 cents for NYSE stock trading and 50 cents for NASDAQ stocks.

It seems to serve me well most of the time but I do not go for extremely volatile stocks.

 

[Trader333]

My stop can be as low as 5c but never more than 25c and depends on the potential reward.


Paul

 

[Dow Dog]

Paul, with such small stop levels, don't you find yourself being kicked out a lot ?

I find that 50 cents with NASDAQ stocks allows the thing to bend quite a bit before bearing fruit.

 

[Trader333]

No I dont, about half are successful and half are not but more recently I have been pair trading where the market doesnt even go 5c against me.

I posted a trade on Thursday showing this and the advantage was that on entry my risk had been reduced to such a small level as to be insignificant. You can see for your self on this link about half way down the page:

http://www.trade2win.co.uk/boards/showthread.php?s=&postid=69949#post69949

Paul

 

[Dow Dog]

Ok Paul.

With my system and my larger stop levels I get a much higher success rate than 50 % but probably a lower reward/risk ratio.

It's obviously different for all individuals and whatever makes you feel comfortable is vital.

Comfort is important when trading because there are too many things that can make you feel distinctly uncomfortable.

By the way I looked at your pair trade. Very nice and something I may take a look at when I have time. Thanks for that.

 

[Trader333]

It is directional trades that have a 50% strike rate, the pair trades, (which I have only really recently been trading), are nearer to 80% (so far), with less risk than directional ones but there is not enough data to make an assessment yet.


Paul

 

[peedee]

Paul, i read MM's look for accumalted stops within the market and take them out( i suppose this is to make the market fluid ), is there ever an obvious place not to put a stop at. PeeDee.

 

[Trader333]

peedee,

I am not really able to answer this as I tend to use mental stops and one of the reasons for this is that, depending on what the market is doing, will determine the type of order I use to exit the trade.


Paul

 

[theknifemac]

peedee

Conventional wisdom in books suggests that stops are often placed a number of ticks above / below resistance / support levels and if market makers decide to run the stops they will engineer false breakouts. Also stops at round numbers are apparently quite common.

Mac

 

[BBB]

Peedee - Thats why I started the thread - to find out about futures brokers 'selling their books'. Just imagine you're a MM. You pay yourself on the spread. Isn't it therefore in your interest to trade into as many orders as possible? Thats why markets move in the direction of least resistance as Wyckoff said. The MM pays to see the orders so he can trade in to them easier without a painful 'price discovery' process.

Where are most stops? Day traders will put them at support resistance points. Daily traders either the same, or just past the previous bars extreme.

As Trader 333 suggests, keeping a mental stop will mean your order cant be seen (as its not there yet). That means your stop wont be gunned for! Takes more discipline though.

 

[BBB]

...what do others think or know about this?? I'm all ears (eyes??)