Actually not nearly as complex. Simply understanding how this "game" is played (excessive orders that need to be offset by the Specialist, thus creating an edge by being on the same side on the opening). Don
Sounds like a great example of Game Theory: understanding the mechanics of the process (rules of the game) to exploit an inefficiency (opportunity). Not much different than a floor trader who sees a large broker entering the pit, providing an indication of where order flow is headed. This tactic is also playing the "game" based on knowledge of the rules and behavior of players, a source of edge when the circumstances are just right. These tactics are in a class of their own, quite separate from the more common speculation based on price and technical indicators. Thanks for reply, Don. I'm just thinking out loud ...
I've been trading the strategy with 200-300 lots using IB. Some observations, - profitable, but have to do due diligence to eliminate stocks in the "news" or influence by moving sectors. Oil stocks can be dangerous. Better to remove questionable ones then have them go against you. - you would think filled stocks would on average, tend to gravitate towards calculated fair value. But most of the time, it doesn't seem to come close. Market direction influence all stocks. Down day, all stocks will lose some value. This strategy seems to give you an entry point with a slight advantage, say, a brief movement in the desired direction. But if you have a buy on a down day, you had better grab it quick. On a buy on a up day, of course, it will give you the profits and more if you hold on. The true test is on the listless days, do the buys/sells move to their fair value. Tough to say, since last few months have had a lot of volatility (I've traded strategy for 2 months). In my limited experience, it doesn't appear to. - I use pre-market trades to determine which stocks will get filled. I only place those trades that look like they will get filled. You need to calculate fair value real-time and place orders as close to the open as possible but it reduces the reliance on needing to send out hundreds of orders only to be filled on 10% or so. Something I don't feel comfortable doing with IB's retail leverage, even tho they seem to allow you to place many orders. I haven't yet hit the situation where my fills exceeded my buying power but I'm assuming I would get auto-liquidate pretty quickly. I've been doing this for 2 months and I'm not convinced opening orders have an advantage based on fair value calculation. It does get you "into the game" in the morning. Takes only 5-30 minutes. And the adage, it's not the entry but the exit is what makes this strategy profitable. You need to be a trader to make this strategy work. Keeping on eye on overall market movement is important. Today, I had 6 longs and one short. Removed the short because it was related to oil. Market direction was slightly up for about 10-15 minutes after the open so I closed out the positions in the green. Once the downturn happened, everything was red.
Remember this has zero to do with the price you cover at being at or near FV. You simply look for a "slingshot" retracement where the Specialist is likely to cover his shares...or, if themarke is going your way, then ride it longer. I set my auto order at 6 and 15 cents (half number of shares each). Still get between 70-80 win loss ratio. You are absolutely correct about preparation... news stocks, pre-market trading etc. Don
I understand that. Many times, my OPG limit orders are priced greater than what is needed to execute the trade. This is based on the envelope prices. But even then if I did get the opening price, I would expect that the price action would gravitate toward the FV price more strongly than it sometimes does. Sometimes it just looks like general market direction is pushing the prices. If there is an edge with this strategy, on a up day, if I have 5 buys and 5 sells, I would expect that my 5 sells would move towards their FV price (even if it's a brief period of time) rather than being pulled up by market direction. I'm not convinced this is happening.
Then it means that the beta (and correlation) of the stocks to the market should be 1 and this is not so. Even after major news being taken into account every stock reacts differently to an up/down open move and to general market news/sentiment on the day.
We don't concern ourselves about overall beta for this. Just the one event "beta" if you will. We simply take advantage of the event when it occurs. When I was running a post on the exchange, the NYSE Specialist for Unocal would tell me pre-market if he had excess shares to buy or sell, and if Iwould like to offset these trades. I would respond with ok (stock closed at $30. for example), I would offer 10,000 at 30.50, 10,000 at 31 etc. ... if the stock opened at 32 for example) then I would be short 20,000 shares, along with the NYSE Specialist. I would then enter covering trades slightly lower, knowing full well that MOST of thetime, the Specialist would be able to cover his shares, as would I. Because HE determined the opening price (to some extent). Similar today, except no info from Specialists direclty, so we enter buys and sells AWAY from where the stock Should open (based on futures etc.). Pretty simple overall... no need to "over-think" it ... it has a pretty good success rate in the long term, but does take more effort than in recent years (more data to deal with). All the best, Don
Since NYSE went hybrid, don't you think the specialist has much less influence? It's more like Nasdaq now. I recall this being discussed in older threads but can't recall the details. Right now, I do make sure to route to NYSE but I use ARCA/ECNs premarket activity to determine which stocks are mostly to be filled.