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Electronic Stock Trading
The Smart Profits Report: Issue #394
Friday, February 9, 2007
Electronic Stock Trading: Electronic Era Poised To Tilt The Odds In Your Favor
By Lee Lowell
Futures Options & Commodities Specialist, Mt. Vernon Research
You’ve probably seen them in action on financial television shows. Or maybe you’ve toured one of the trading exchanges and seen them for yourself. It’s a unique and chaotic experience. A mass of feverish activity, yelling, and jostling in a desperate bid to get the best price.
I’m talking about the floor traders in the pits of exchanges like the Chicago Board of Trade (CBOT) or New York Mercantile Exchange (NYMEX). There’s no doubt that these guys are relentless and a force to be reckoned with. As a market maker myself for six years at the NYMEX, I’ve seen it first-hand.
But it looks like they’ve met their match, and we could be witnessing the slow demise of the traditional floor trader - a development that bodes very well for regular retail investors like us with the advent of the electronic stock trading screen technology.
Technology Hits The Pits… And Trumps The Traders
As technological advancements and the Internet have triggered a shift to electronic stock trading screens over floor trading, this is a hot topic currently making the rounds within the trading community - and it’s a development that could significantly change the trading landscape.
Having been in the pits myself, I actually thought this would have happened by now. But I still believe that the physical exchanges will become a thing of the past in the not-so-distant future. Electronic stock trading is faster, more efficient and more cost-effective to all parties involved.
Because of my background in the job, I’m hearing lots of stories about how many floor traders are either voluntarily moving to electronic stock trading screens, or involuntarily making the move (given a pink slip).
But the thing is… there’s a major difference in how each type of trader earns a living - and it’s the floor traders who are having the difficulty making the transition. So because I’ve done both, let me give you an idea of how money is made on both sides of the fence.
The Options Market Maker’s Sole Job
As a floor trader, specifically an options market-maker, the sole job is to provide a bid and ask market for any option requested by a floor broker. These floor brokers ask for quotes for either their customers or their own firm’s traders.
No matter who we were giving quotes for, we were almost always able to buy the option at our bid price and/or sell the option at our ask price. This is in stark contrast to how we as retail traders get filled on a trade. We’re mostly at the mercy of the market makers and have to either buy at the ask price and/or sell at the bid price, unless we work a limit order and get filled in between.
The market makers make their money by doing many of these trades, where they can buy the option at their bid and re-sell it to someone else at the higher ask price, or vice-versa. When I was doing it, we didn’t care so much about the direction of the stock or commodity because that didn’t define how we made money. As long as we were buying below and/or selling above what we deemed “fair value,” that’s how we made money.
Now let’s shift 180 degrees and see how retail participants like you and I try to make money…
The Options Two-Step: Predict The Direction And The Time
If you’ve followed any of my recommendations in the Xcelerated Profits Report newsletter, or my Triple-Zone Profits Trader commodities service, you’ll know that things work a little differently.
We have to try to predict where the market might head and base our decisions on that prediction.
This is where you need to draw on a range of research, including both technical and fundamental analysis, the macroeconomic outlook, and also my personal success at predicting market direction and trading options on the floor.
However, keep in mind that trying to predict the timing of a move, or when it might get to our predicted spot, is probably one of the hardest things to do. But there are plenty of people who think they can. When you’re trading options, however, the “time” factor plays a key role in whether you’re successful or not. After all, there are many people who will “eventually” be right on their directional assessment but might be very far off the mark when it actually occurs. That’s why we show you how to use the best strategies to keep you from falling into that trap.
Electronic Stock Trading Turns The Tide
While it seems like the floor traders scoop up most of the money and it’s harder for retail investors to compete, the tide is turning on the pit crew. The increasing presence of electronic stock trading is beginning to squeeze floor traders out. Because we can now post our own bid and ask prices on the trading screens, we’re all starting to compete on an even level - and have an equal shot at making money.
And since us retail traders had to learn ways to make money on the electronic stock trading screens, we’re actually ahead of the floor traders who might be unfamiliar with this, since reading charts isn’t so important in their daily activities.
And commodity floor traders in particular hate it! I believe the reason why the commodity exchanges are the last ones to go “electronic” is because they put up such a strong fight against losing their advantage.
As the commodity exchanges get reluctantly dragged into the electronic age, the option market makers here are safe for now. But that doesn’t mean we still can’t compete. As I’ve written many times before in this column, my Delta Force Trader trading advisory, and also in my debut book, I show you how to use options investing techniques where you can use direction and time decay to our advantage.
This includes covered calls, option credit spreads, and naked put selling that I use in 95% of my own trading. And as electronic stock trading screens level the playing field, we should have many more (and better) moneymaking opportunities in future.
Good trading,
Lee Lowell
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Today’s Smart Profits Cribsheet
- There aren’t many investors who have the luxury of being wrong on their trades… yet still end up winning. But you can when you use one of the most powerful strategies: The option credit spread. Not only that… but you can also calculate your actual chance of success on a trade before you enter it. Get all the details in Smart Profits #364, Credit Spread Trading: How To Be Wrong… And Still Win On Your Trades.
- Having spent six years as a market maker on the floor of the New York Mercantile Exchange, Mt. Vernon Research commodities trading expert Lee Lowell is one of very few people privy to the rare insider tips and secrets that the pros use every day to make money. Now, in his debut book, Get Rich With Options: Four Strategies Straight From The Exchange Floor, he’ll reveal the four strategies that he personally uses to churn out profits for him in the options arena. And using real-life examples of actual trades, Lee shows you how to use these techniques decisively for the fastest route to riches in the options trading game. To get more information, visit this link.
- You don’t always have to be an options buyer, and you don’t have to own something first before you can sell it. The great thing about the financial markets is that you can sell first and buy second, instead of the long-standing philosophy of buy first, sell later. But you have to know how to sell them correctly. You can’t just sell any old option and think you’ll have a profitable trade. You have to take into consider the following in Smart Profits #267, Option Credit Spreads: Sell First, Buy Second for 50% Better Odds.
Related Articles:
- Market Makers: Hand Signals, Stress and Million-Dollar Trades
- The Breakdown Of A Covered Call Trade: How You Can Get Paid For Holding Stocks
- The Chicago Board of Options Exchange: The Website Every Options Trader Should Know
