A new bill was just introduced by Representative Loudermilk (R-GA), that appears to amend the Securities and Exchange Act of 1934 to basically reduce or eliminate regulation overreach into business models of exchanges that do not involve either reporting or effecting a transaction on the exchange. As Representative Loudermilk stated when introducing the bill, “Regulatory agencies have a tendency to expand their reach into areas they should not be regulating and engage in mission creep, which can stifle innovation”.
What Could Drive the Proposal of HR3555? Since the publication of Flash Boys in 2014, there has been a flurry of lawsuits against dark pools and exchanges, amid accusations of market rigging with aiding HFT activity, in essence aiding and enabling unfair trading. One particular lawsuit alleged that dark pool Barclays, in addition to 7 US stock exchanges, including The NYSE and Nasdaq, manipulated pools to give HFTs market advantages. Day Traders everywhere were watching the outcome as this has been a frustrating development in the market for quite a long time. This groundbreaking lawsuit brought under U.S. District Judge Jesse Furman was a consolidation of one suit from the State of California with four suits from the District of New York, and was eventually thrown out in August of 2015. Counsel for the defendants claimed that the Plaintiffs rushed into a lawsuit without taking the time to properly plead their case, partially brought on by the allegations in the book Flash Boys. The Judge threw out the lawsuit stating that stock exchanges had immunity because their actions fell within “quasi government” powers. While the exchanges and dark pools may have won the battle, the war is far from over. We’ll be watching the outcome of Bill HR3555, and what the Committee has to say. Great Point Capital has been serving the trading community since 2001, with 100+ prop traders actively trading the firm’s capital. Headquartered in Chicago with offices in Austin, TX, we specialize in equities and equity options. Contact us today to learn how we can successfully trade together with high performance results. We are one of the few firms able to offer access to Takion Software Platform, enhancing your online equity trading experience.
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You may not be aware that a professional trading firm can replace your online broker, bringing you bigger better returns at a lower cost to you. Out of convenience, or just lack of resources, we fall to the comfort of trading with an online broker like E-Trade or Ameritrade, but there are actually much better options.
With lower commission, faster execution for a better quality of trade, and more order types to choose from, you owe it to yourself to see how Great Point Capital can replace your online broker. Directed Orders You are probably not aware that most online brokers sell your orders to the highest bidder, which is also called “payment for order flow”. Payment for order flow, (POF), is a widespread arrangement that has been around for quite some time in US Markets. POF is an arrangement where a third-party firm pays the online brokers to send orders to them, instead of to the open market. With professional trading firms, you can direct your order however you like. See if your online broker allows you to do any of these:
Professional trading firms have access to a wider variety of order types that will benefit you when either adding, or removing, liquidity. Trading with the best matching order type with speed and quality execution is the key to higher returns. Great Point Capital offers the resources and knowledge to utilize the most advantageous order type, netting the best return on your investment. Short Stocks Have you ever tried to sell a stock short, then your broker declines the order as ‘not available to short’? Pro firms maintain clearing relationships with firms that have comprehensive lists of easy-to-borrow stocks. Professional firms like Great Point Capital use third-party locate firms to fill in the gaps, and track down stock for you to borrow at reasonable costs. Great Point Capital offers the widest selection of stocks to trade by partnering with firms that specialize in locating hard-to-borrow names. Advantages of Pro Trading Firms Over Online Brokers There is a lengthy list of advantages of working with a professional trading firm over an online broker. With a professional firm, you immediately gain with lower exchanges fees and commissions, better quality and faster execution of your order, advantageous order type and hard to borrow stocks availability, all resulting in higher returns for you. If you keep high-balance brokerage accounts to take advantage of opportunities in the market as they arise, or are an active trader trading more than 10k shares per day, you owe it to yourself to look at pro firms like Great Point Capital. As a FINRA firm, GPC offers you a retail brokerage account with SIPC-insured backing and all the advantages available to professional traders. Great Point Capital has been serving the trading community since 2001. We are one of the very few firms able to offer access to Takion Software Platform, enhancing your trading performance with fast and high-quality order execution. GPC offers professional and experienced wealth management. Contact us today to speak with one of our knowledgeable trading experts and earn maximum earnings on your trades. If you’re looking for some good books to add to your knowledge of Day Trading or Trading Stocks, we have a couple that we give two thumbs up in review: Reminiscences of a Stock Operator by Edwin Lefévre, and Market Wizards, Updated – Interviews with Top Traders by Jack Schwager.
Basic age-old philosophies still have merit and we would love to share with you some of the best educational material for day traders from timeless classics to compelling documentaries set in today’s fragmented market structure. The following two day trading books are sure to enrich and enlighten a trader new to the business and even the experienced quantitative trader.
Jesse Livermore was born in 1877 into a farming family of Massachusetts. He left the life planned for him on the family farm to put his superb mathematical and analytical skills to use trading stocks. He is famous for making several multi-million dollar fortunes during the 1920’s, (over one billion dollars by today’s currencies), and then losing them several times over. Throughout his illustrious career, he amassed a wealth of knowledge that has been shared for decades through the writing of Edwin Lefévre, including the following quotation, one of many, that is shared in this book: “It was the change in my own attitude that was of supreme importance to me. It taught me little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.” It may appear that some of these factors have been removed from the decision making process with the onslaught of computerized algorithms driving the stock market today. Edwin Lefèvre reminds us that in spite of the changes with technology, these human factors still drive the tools we use for trading today. Reminiscences of a Stock Operator has offered wisdom to investors and traders for generations, even Alan Greenspan is quoted as saying that it is “a font of investing wisdom”. An updated version was published in 2009 with insights into the life of Jesse Lauriston Livermore. We highly recommend this book, it is sure to please while adding to your understanding of stock trading.
Schwager showcases interviews with some well known money-makers like Paul Tudor Jones, founder of Tudor Investment Corporation, philanthropist and hedge fund manager. He also features and interview with Ed Seykota, a commodities trader with degrees in both Management and Electrical Engineering from MIT. Ed was an original pioneer of computerized systems trading. Bruce Kovner declined an interview to Fortune Magazine when they wanted to run a story called “The 11 Billion Dollar Man”, as he rarely gives interviews. Bruce graduated from Harvard College in 1966, then started trading commodities. He founded Caxton Associates in 1983, a well-known hedge fund. Jack Schwager reveals these industry leaders’ trading philosophies, thought processes and skills deemed necessary to be a successful trader on Wall Street. Schwager summarizes what he believes to be the biggest lessons learned from his interviews. Shwager offers a variety with different market outlooks, and each success story differing from the last. One thing stands out as a constant, however, that solid methodology combined with the right mental attitude are fundamental characteristics for trading success. Give Market Wizards a read, we’re sure you will find it as enjoyable as we do. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. Great Point Capital, LLC offers buying power, access to Takion software platform with excellent IT support, and the benefits of working with an experienced team. Advent of Computerized Online Trading and Alternative Trading Systems
In 1998, the SEC rolled out Reg ATS, which allowed off-exchange venues to operate as an exchange while exempt from registering as one. This brought about intense competition from the various Alternative Trading Systems (ATSs), as they are not subject to the same stringent requirements as the registered exchanges. Reg ATS addressed concerns brought about by trading on these types of venues, however, by legalizing this type of trading the SEC also fiercely increased competition by providing many more options to investors. Reg ATS contributed to a fragmented marketplace, as once dominant stock exchanges drastically lost valuable liquidity. The SEC responded to the rise in trades occurring in the various off-exchange venues with Reg NMS. The National Market System (NMS) sought to improve fairness by displaying the best price, regardless of where the order originated. All participants in the market have the same access to the Securities Information Processor (SIP), which consolidates all market data for securities. All trading venues including Alternative Trading Systems (ATSs) and dark pools, are required to provide securities data in real time to the SIP, and are not allowed to provide this information to customers prior to the SIP, providing transparency to the market. Reg NMS further obligates venues to conduct transactions at the NBBO, or National Best Bid Offer. The role that the SIP plays in the market is an important factor in the rise in fees for direct data fees. If everyone received the SIP information at the same time, it wouldn’t be necessary for proprietary data feeds costing tens of thousands of dollars monthly simply to access “Premium Data” resting on exchanges servers. As long as this data is ‘distributed’ at the same time, exchanges are in compliance with Reg NMS. When the recipient receives that information is out of their control (although it is painfully obvious that a direct feed will receive data faster than information first routed through the SIP). The SIP is necessary for consolidating market data, although there is a latency problem due to this requirement, it takes time to consolidate each venue’s data. Even though it is only a matter of microseconds, the difference in time compared to direct data feeds is significant. Direct data feeds co-located to the exchanges servers provide instant market data considerably faster than the SIP. This difference in latency opens up a window for computerized algorithms to dominate the activity by snatching up securities at an advantageous price, sometimes even causing a shift to the NBBO then using that to their advantage. This is why market makers are at the mercy of exchanges, they have no choice but to purchase the direct feeds. The SIP along with Direct Data Feeds represent a two-tiered market, although revenues from proprietary data products go directly to the exchanges selling them. The information from the SIP is always a little ‘late’, requiring a direct data feed to conduct competitive trading for clients, thus providing the best value to investors. Great Point Capital, LLC is headquartered in Chicago with offices in Austin. We strive to provide our traders with the necessary tools and support to fully maximize their trading potential. We are one of the few firms authorized to utilize the Takion software trading platform, giving full access and support for successful trading. Flash Boys, a Wall Street Revolt
Michael Lewis is the author of Flash Boys, a Wall Street Revolt, written about a group of men that banded together to investigate the insidious happenings on Wall Street. Flash Boys was published in 2014, and is a non-fiction account of the rise in high frequency trading due to predatory new computer algorithms put in place by brokers and big Wall Street banks. Flash Boys reveals how, as the band of revolutionary new Wall Street friends claim, the market is rigged. Brad Katsuyama, and several of his colleagues walked away from million dollar employment offers to get to bottom of what was happening on Wall Street to inform the public, investors, and other traders of how predatory HFT firms were manipulating the market. The book starts out focusing on the new found love for speed in the marketplace. Not just timely, we’re talking microseconds (a microsecond is one millionth of a second)! Installing the newest and fastest high speed fiber optic cables, gave an advantage to only big Wall street banks and brokers, an advantage worth billions of dollars. Lewis reveals, in fact, how many of them were willing to pay millions of dollars simply to gain a few microseconds of an advantage. This book explains how electronic algorithms have replaced the human trader on the floor, and how this sweeping technological change has impacted the markets. Brad Katsuyama, and his colleagues went on to found IEX, the Investors Exchange, the newest Stock Exchange recently approved by the SEC, offering a solution to fix some of the broken areas they revealed in their quest. Brad set out on a mission to pursue the truth about what was happening in the markets since the onset of electronic trading. He never lost sight of his goal of informing investors of the truth, and maintaining his ethical values. Flash Boys is a very enlightening book for not only day traders, but for anyone with a retirement or investment account of any size. Michael Lewis grabs your attention with the first chapter and keeps you engaged and wanting to know what’s coming next until the very end. This one is definitely a worthwhile read. Read more about IEX, The Investor’s Exchange, in our recent blog. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. Great Point Capital, LLC offers buying power, access to Takion software platform with excellent IT support, and the benefits of working with an experienced team. RegATS, RegNMS and the effect on Markets
RegATS was established in 1999, and actually increased the popularity of ATS (Alternative Trading Systems), as they then became allowed to register as a broker dealer, rather than as an exchange that must adhere to more stringent rules. This caused the volume traded on ATS systems to increase, having the opposite effect on the markets as they quickly lost liquidity. The SEC responded in 2005 with RegNMS, which was aimed to unify and streamline the ATS market share by requiring that all orders coming from an ATS be routed through a national market system, creating one combined network. RegNMS also required that all exchanges route all orders, regardless of where they originated, to the trading venue with the best displayed price, which did not necessarily have to be on an exchange. These regulations dramatically decreased the strong position that exchanges had on the market, as they lost even more liquidity. Prior to RegNMS, for example, the NYSE traded approximately 85% of total market share, while after RegNMS that volume dropped to about 30%, and went as low as 20% in 2014. Trading in ATS venues and Dark Pools was even more attractive with these regulations, along with a loophole in RegATS which allows trading with hidden prices as long as the total volume of those trades is less than 5% of the volume trading of the stock nationally. Investors were allowed to go into dark pools and trade anonymously to avoid alerting the HFT firms of what their intentions were. As more and more investors went to dark pools, exchanges again lost market share. SEC Begins a Tick Size Pilot Program to address Trade-At Rule Various proposals have been addressed to the SEC as options to implement a Trade-at Rule to address the liquidity of the markets and off exchange trading. One proposal referred to as a Tick Size Pilot Program is in process currently and will evaluate the effect of widening the tick size. Under this pilot program, the tick size will be increased from one cent ($.01) to five cents ($.05), only on certain piloted securities. Three groups and one controlled group were put into place, each with separate rules to trade by. One of the groups is actually using a trade-at rule, while another is required to quote in increments of $.05, and yet another must quote and trade in $.05 increments. This Tick Size Pilot Program just started last year in October of 2016, and is schedule to run for two years For more information on this pilot program, and to receive email updates of the program, visit FINRA.org. Other systems proposed include the “Grand Bargain” which was suggested by the Intercontinental Exchange, ICE, which suggests a trade at rule combined with reduced access fees Another proposed plan by Nasdaq suggests merely a decrease in fees with no trade-at rule at all. Our View on Trade-At Currently the trader's public quote acts as a reference price for POF firms and dark pools to trade in front of him. If a trader decides to display a quote in the public markets, that trader should get executions when orders come in at or through his displayed price. The trader only gets executed once POF firms do not feel there is an advantage any longer at that price. This means that the trader that risks the most in displaying a bid or offer is the last to be filled at that price. That is not a fair system, and de minimis price improvements should not be used to justify the practice. Most traders competing with this pricing model agree – a Trade-At Rule is necessary. Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. Impact Technology has on the Market
The liquidity of US Stock Markets have been greatly impacted by the rapid advancement of smart computer algorithms working in conjunction with ECNs (Electronics Communication Networks), ATSs (Alternative Trading systems) and Dark Pools. The automation of smart computers along with liquidity in off exchange venues has contributed to a dramatic increase in trading on these alternative venues and have caused quite a dramatic decrease in volume traded on registered exchanges. It is this high speed coupled with the choice of using an ATS for fast execution and low cost that was a catalyst to what we now refer to as High Frequency Trading (HFT). HFT firms incorporate the speed from smart computer algorithms which gives them the ability to see orders in process, and buy them up for themselves. Since they can see all pending orders, they know if they’ll be able to turn around and sell at a slightly higher price, even in the sub-penny price range. On high-volume orders, fractions of a penny add up to millions of dollars. Sub-Pennying This combination of speed from computers and liquidity in ATSs, added to the decimalization of the markets in 2001 has spurred another predatory practice referred to sub-pennying, which goes right along with HFT, and occurs regularly today. Sub-pennying occurs when a broker gets in front of a displayed order by 1/100th of a penny, or .0001. This is all done inconspicuously with a computer algorithm program that allows them to see an order is pending, so they’ll buy up shares within a sub penny difference. Sub-Penny trades occur because POF firms have to validate taking the trade for themselves, so they improve the price by .0001. The market is showing $10.00 x $10.01, so when an order comes to the POF firm to sell at $10.00, they fill it themselves at $10.0001, letting them claim they improved the price for the customer. The truth is that there is probably a bid in a dark pool at $10.005, that the POF firm will then sell, immediately making themselves .0049/share in the process. Even if there isn't anything in the middle that they can immediately get out of the trade, they are far from the bid, which is what all bidders in the market at $10.00 wish they could be. All other bidders never get the chance, however, as the POF firm steps in front of them without ever having to risk putting a bid into the open market. This leaves traders experiencing whiplash in a scenario of “here one minute (second in this scenario) and gone the next” when attempting to execute their orders. Most traders that we talk to agree – a Trade-At Rule is necessary. Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. Payment for Order Flow (POF) is the cunning practice of many third-party firms that pay brokers to send them their trade orders, many retail trades, instead of sending them to the open market.
The POF firm can then either take those orders and execute themselves, or they can pass it on to the market to fill against existing quotes. As the typical retail investor is basically uninformed and do not see the real-time market prices, POF firms love receiving retail trade. When they sell to the customer they may offer a price improvement of 1/100th of a penny, giving the appearance of a price improvement. In reality, they may have already seen that the NBBO is moving downward, so they’ll jump in front of it and make the execution at the current higher price, then immediately buy it back at a discount. They also may find it in a dark pool at an even greater discount. Furthermore, firms paying for order flow are using high speed direct data cables, allowing their computer algorithms to pick up on the price change fractions of a second before its represented in the NBBO. This speed advantage coupled with the guaranteed order flow creates a liquidity problem for daytraders, who can only trade what’s left of the POF and High Frequency Trading (HFT) firms. Current Regulation When it comes to payment for order flow, disclosure is the main approach taken by the SEC. Rule 10b-10 requires broker-dealers to reveal that a payment for order flow arrangement exists on their customer’s statement. They are not, however, required to disclose information regarding the source or the nature of the compensation received, unless the customer submits a written request. It is doubtful that customers are even reading the fine print or the quarterly reports, and even more unlikely that they’ll submit a written request asking about the payment arrangement. Brokers are required, however, to complete the trade with the “best execution”, and at the best NBBO price. This is what can create a conflict of interest. Some exchanges offer different pricing models, which could be incentive to some brokers to look for the best price under the NBBO, but they may also search out the best rebate available to them. Rather than just require disclosure, perhaps the implications to the investor, the market and all traders should be reviewed further. The benefit to the broker is obvious – rather than incur an expense to trade, they enjoy a robust profit center. How does this benefit the firm paying for order flow? The advantage of a first look at orders before displayed on the market is the clear advantage here, it’s what allows them to pay for order flow and still turn a profit. Does this elite privilege come at a cost to the market and investors? This particular topic has generated a lot of attention as Senator Carl Levin has called for a complete elimination of the practice. Of course Michael Lewis and his best-seller “Flash Boys” contribute to raising awareness to this and various other questionable Wall Street practices. Most daytraders that we talk to agree with Senator Carl Levin and Michael Lewis in that Limits on Payment for Order Flow are long overdue! Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. One thing stands out as a thorn in the side for daytraders, Payment for Order Flow (POF). POF has been present in United States markets for quite a long time now, as it is a common practice going back to the 80’s where master manipulators like Bernie Madoff fine-tuned the practice for the benefit of POF firms. POF occurs when a third-party firm pays a brokerage firm to send their orders to them, rather than to the open market.
The POF firm can take the order and either execute it themselves, or pass it on and send to the market for fulfillment against other existing quotes. The majority of the trades passed onto POF firms are retail trades, which POF firm especially enjoy, as the retail trader is not as knowledgeable of the market and its inner workings. The typical retail trader does not see true-real time market prices and they remain relatively uniformed. Current Regulations Rules 10b-10, 606 & 607 under the Exchange Act dictate that when these transactions occur, the broker-dealer is obligated to disclose the agreement in public quarterly reports, and also to the customer. The broker is also required to execute the trade with the best price according the National Best Bid and Offer (NBBO) and with the “best execution”. This has the potential to create a conflict of interest, as some exchanges utilize different pricing incentives to brokers to not only look for the best price at the NBBO, but also to trade where the rebates are greatest to them. Implications to Traders and Investors When the typical American consumer places their retail trades from home in the evening, they may stipulate that they’d be willing to pay up to $20.10 for a share of XYZ Stock. The firm buying these orders can see what they want, and they can see that the NBBO is at $20.09 x $20.10. This is where they can pass the order onto the public markets and buy the $20.09 offer, or it’s more likely that they will sell the stock to the customer from their own reserves at $20.0999, to give the appearance of improving the execution in return for jumping in front of every other offer at $20.09. They now are just inside the bid and have the possibility of midpoint pricing in dark pools to buy it back at $20.095. Role of Technology In addition to this, POF firms utilize quick direct feeds to see the market milli-seconds before it is available in the NBBO. In the above example, this means it’s possible that the market has already moved from $20.08 x $20.09. If the NBBO is still displaying an offer of $20.10, they can give the execution at $20.10, which is the best official offered price, and immediately buy the $20.09 offer they know is coming. Even when the buy-sell difference is a fraction of a penny, do not be fooled, this is a multi-billion dollar industry available only to the select few. This practice hurts the average day trader as the POF firms process all of the uniformed retail customer orders first, leaving the informed flow as all that’s available to be absorbed and traded by the exchanges. Another frustration for daytraders trying to sell at their $20.10 price is that they act as nothing more than a pricing reference point for firms that see the orders first. The trader only gets to sell at the $20.10 price if the firm seeing their order decides not to sell it themselves, which would likely mean that it is not a good trade any longer. If you are an experienced, hard-working trader frustrated with your ability to get quality executions, Limits on Payment for Order Flow is probably high on your Wish List. Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. Payment for Order Flow (POF) is a common practice that has been occurring in the United States markets for a long time now. This practice, in fact, was happening in the 1980’s with master crafters Bernie Madoff taking the front lead. The arrangement of POF occurs when a third-party firm pays a broker to send orders including a large amount of retail orders to their firm instead of to the open market.
When the POF firm gets their orders, they can either pass it on to the market to be filled against existing quotes, or they can execute it themselves which is more probable. If the buying firm sees an order for $10.10 for example, they can sell the stock to the customer themselves for $10.0999, giving the appearance of giving a price improvement. Now they’re just inside the bid and they can take advantage of midpoint pricing in dark pools and can possibly buy it back for $10.095. Direct high speed data cables connected directly to exchanges allow their computer algorithms to pick up on the National Best Bid and Offer (NBB) fractions of a second before it’s widely represented, allowing them to see a move to possibly $10.08 x $10.09. If the NBBO hasn’t changed yet and is still showing an offer of $10.10, they’ll give the execution at $10.10 adhering to the best official offer price, and turn around and buy immediately the $10.09 offer they know is coming. The implications to the average day trader are that they are the last to have their orders executed because once the POF firms process their orders including all retail customer trades, traders are left searching for what’s still available. All too often, when day traders try to sell stock at $10.10 referring to the example above, they act as nothing more than providing a reference price for the firms that get to see the orders first. Typically, the only way that the daytrader gets to see at the $10.10 price is if the POF firms decide not to sell it themselves, which means in most cases that it’s no longer a good trade. This is quite a disadvantage. After talking with several experienced daytraders, the consensus is in, and most daytraders agree that a Limit on Payment for Order Flow would be on the top of their wish list. Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. |
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