Newbie Question About High-Volume Penny Stocks

Discussion in 'Educational Resources' started by firelord314, Feb 20, 2010.

  1. Hello-

    I'm just a lowly college student, but I'll soon have enough money saved away to begin investing. While I wait, I've been playing around with an investment simulator.

    In the past week, I've noticed a pattern in certain highly-traded low-price stocks: they oscillate rapidly between two prices (usually 1 cent apart). Fannie Mae (FNM) is a good example: it spent most of Friday bouncing between $1.01 and $1.02. I tried looking ask/bid prices up on Yahoo, but it just gave me “N/A”.

    I'm deeply suspicious of this behavior; it seems WAY too easy to scalp a 1% profit in the span of 10 minutes. But, the Investopedia simulator seems to think I can do just that.

    So, my question: is this “real” behavior? If it is, what are the limitations of trading on it? If it isn't, what causes the illusion?

    Thanks for your time!
  2. Assuming that the Investopedia fills you instantaneously at bid/ask. In live trading, you have to wait in queue.
  3. IMO, 2 issues, but could be good

    1. The cost of trading subdollar stocks, and the small spreads that they have, subdollar you are looking at hundreds of a cent. Yahoo rounds. Your cost on both sides of the trade will destroy a lot of the profits. You will need to make a cent on 2000+ shares minimum with 10$ a trade. If you go with a big company that changes prevailing market rates plus a couple tenths of a cent commision you are going to need to trade a monster amount of shares for this to be worth your while. And you will also need 25000 minimum as this is "day trading".

    2. That your queue is going to be massive, combined with your inability (I assume) to not get the flash orders. You will be able to get some of the volumn, but you are not going to have to the advantages of the big boys.

    Now the good part, if you can get market rates, and can get flash orders and the stock is just above a dollar, with heavy heavy volume, this could be an amazing trade. Its simply a volumn situation, and you need to also be patient, with orders on pretty much all of the ecns and exchanges.
  4. Thanks. How long is the queue, typically, when daily volume is in the 10-20 million range? (Or is there a place I can find out for free?)

    Also, after doing some more reading, I can rephrase my first question: is this price oscillation just an artifact of a market maker profiting off the spread? If so, just how difficult is it for individuals to do the same? I'm looking at $10,000-ish investments. (I'm assuming the “25000” you mentioned is a broker-specific requirement…?)

    And by “flash orders”, are you referring to the 30 millisecond lookahead that made the SEC mad last year, or something else?

    Thanks again. :D
  5. Ok, so lets make some assumtions, first off, the flashorders are a heck of a lot more prevelent on stocks like this. Also, there will be a ton of prints for 1.0201, and 1.0301, as those can be internal trades within an organization or flash orders that you cannot touch. The queue is based upon the different ecns. Some of them will be hours, some of them, will be a few minutes, ones which cost nothing to add/remove liquidity from will hit earlier relative to volume. Also dark books will affect the amount of fills you are getting.

    The spread is the marketmakers profit (plus the rebates) so yes you can do it, but you need that 25000 to be able to LEGALLY intraday trade equities. This is the amount required by law. Go with a prop firm like swift or titletrading if you want to learn how to capture that cent without any of your own money. And believe me, there are hundreds if not thousands of people trying to do what you do on those stocks. And my guess is there will be a minimum of 250,000 shares on either side at any given time.

    Best of luck in your trading
  6. Great points... I've tried to look into it using my algo's, but the rebate for under $1 doesn't make it cost effective. I'm even having trouble integrating FNM into my strategy when its above $1.