Realtick SHORT order execution , question...

First, many thanks to all that responded to my question on RT III order execution. I have used ISLD today, my first day live trading, and I am pleased with the results of the execution and I was green for the day! I am still a little unclear on executing a short order. My current understanding is that you would check the short box and press the sell button (with consideration of the uptick rule). Then you cover the short sale by pressing the "BUY" button. Is this correct? Even Tony Oz responded, recommending ARCA, which I will soon try and I will report on my discoveries. These little issues are BIG problems for us newbies, so thanks again to the more experienced traders here that provide such valuable and helpful information for the simple reward of self-gratification. Thanks again to all of you.

Good trading,
Arky

 

You are correct with your comments. Just wanted to let you know that you can experiment with your order routing layout by right-clicking your mouse on the order entry part of the screen. This will bring up a menu with several choices. The one that I use has a "Sell Short" button as well as a "Sell" button so you don't have to worry about checking the "Short" box. It's just more convenient. In the above comments I'm assuming that you are using the order entry dialog box on the "Market Maker" window and not the stand alone "Order Book".

If you are trading NASDAQ stocks then there are two ways you can short. First, as you may or may not know, NAS stocks can be shorted on an up-bid, which means it is not necessary to have an up-tick as is the case with listed stocks. So, that means that you can sell short directly into an up-bid whereas with listed stocks you can only short when someone buys from your offer to sell. I have had trouble shorting with Island unless you just offer stock at a particular price and wait for it to get hit. This can be a problem if the stock is moving away from you. So I use ARCA almost exclusively because of it's more sophisticated routing properties. With ARCA you can set a limit order below the bid (down as low as you are willing to short) and ARCA will handle the rest. The system will keep dropping your offer as the market moves down until it reaches the limit you specified. Or, if it's an up-bid and you use ARCA, it will execute against the available shares on the bid. I'm not entirely sure but do believe that Island will also allow a short directly into an up-bid but will not perform more sophisticated routing as ARCA will. With Island, I always get a warning stating that my offer must be .01 above the bid. It's just doesn't work well for me, so I use ARCA (unless, as stated earlier, you just post an offer to sell and wait for it to get hit). Hope all of this helps.

Glad you were "green" your first day out. Just be careful out there!

 

Nasdaq shortsale rule says that you "cannot effect a short sale at or below the bid on a bid downtick" therefore, though you will have to work to see this in writing anywhere, there is nothing that says you cannot short below the bid if the inside bid is an upbid. This is particularly relevant with decimalized, supersoes trading where the inside market is usually chaotic when a stock is showing momentum.

Take a stock that is selling off hard...just broke a major support level...futures just rolled over at resistance etc. and you would love to get short. Pre decimals and SS, you had these thick offer levels (everyone wants to sell) and thin bids, with the minimum 1/16 spread between them. So you can't hit the bid-which is shrinking fast-because of the uptick rule but if you offer it out with the other 20 participants at the offer, who the heck is going to take your offer? No one. Then the bid level is lost, a new low bid is established (still an unshortable down bid) while instantaneously everyone goes low offer at the old bid price that was just lost. Though to get short in this scenario.

As Sallyboy indicated, it is true that ARCA will re-adjust your offer price to the lowest price possible (usually the offer price if the stock is at the minimum spread) each time a new low bid/offer is established, but is this really useful since the stock is selling and hardly anyone is buying offers at this point? So finally you get filled and for a second you're happy, but you realize you just chased it 3/4 of a point and the fact that your offer was taken signifies the bounce/reversal and you watch a quick loss unfold. Frustrating but happened all the time in pre-decimal/SS days.

Fast forward to Oct 2001. What is the inside market now? Technically its the inside price level which is separated by a whopping penny or two from the next levels and so on. Now consider market maker exposure with the SuperSOES 0 second delay and executions against reserve volume and we hardly ever see MM's hanging around at these thin penny spread inside levels, rather the inside prices are dominated by individual ECN's with MM's quickly darting in and out.

So consider the example above, stock is selling hard broken support etc. Bid is a down bid so no ability to short at or below the bid. Last bidder pulls his bid at $50.01 and a new low bid of $50.00 is established (a whopping penny below the one before). These bids shrink fast and are gone in a blink and we're about to establish another new low bid at $49.99 etc.

But at that same instant some ECN trader is about to join the bid at $50.00 to cover an already profitable short (or go long speculating a bottom ...who cares why..) and he clicks his buy bottom to join what he thought was the current bid at $50.00. However a split second before he does the last bidder at the $50.00 price pulled and for a second the new bid was a lower one at $49.99, though its lifespan will be about a millisecond. Now, when the ECN trader hits his buy button at $50.00 at virtually the same instant, he re-establishes $50.00 as the inside bid...only now $50.00 is an upbid. Then his measly 500 share $50.00 bid gets whacked followed by all the $49.99 bids as the stock continues to tank. So how is this relevant to a DAT trader?

Well, if you felt the stock was going to continue to gain momentum on the downside, in the "old" days shorting was difficult (join the offer and get filled at the reversal). But today, you can join the offer at a penny above the bid (rather than a 1/16) and as the inside levels fly all around in chaotic fashion, you have a much better chance of getting filled and still satisfy the uptick rule as ECN passive orders temporarily become aggressive (eg matched with the offer prices etc) as the inside prices go back and forth etc.

Or, if the stock is really tanking and you want to get short, you can watch for that brief bid uptick to occur as in the above example-it will be brief-and fire off a short order. Do you price it at the price of that brief upbid? Hint: in the example above it was one 500 share buy order against presumably many sell orders so perhaps your chances of getting those shares is slim. So, what happens if you price the short order at say $49.97 (would you give up 2 cents to get short in a tanking stock?) at the brief moment the inside bid price goes to $50.00 (and an upbid) on that hypothetical ECN bid, which then immediately gets hit and the bid goes back to $49.99 (a downbid). Will your order at $49.97 stay live and go for one of the bids at $49.97 or get killed for violating the short sale rule? Remember the NAZ uptick rule above.

Answer: with SOES the order gets killed. But, with ECN's the interpretation may be different, giving you some flexibility in "effecting" short sales when downward momentum already exists. Play with it and see what you find. I hope that helps and welcome all who struggle with short execution and or understanding this post to check an example of this at:

www.tradecourse.com/modules/shorting_execution.htm

 

That's it Magna.

The only thing that I'd clarify is point 2. How the order is handled initially depends on a couple of things. Using your example of a 30.20 x 30.23 spread, if the 30.20 is an up-bid then ARCA will hit the shares at 30.20 (and I believe below that, but it happens too fast to always tell for sure as you can imagine). I use RealTick and my Market Maker window has a bid indicator (an arrow, along with the usual up-tick / down-tick arrow). So if 30.20 is an up-bid (i.e.- higher bid than the previous bid of say 30.19) then ARCA will hit those shares. If it is not an up-bid (say the previous bid of 30.21 was taken out), then ARCA will post an offer at 30.21. Then it proceeds as you stated in your post, following the bid down until your limit is reached.

I'm not sure about other ECN's hitting an up-bid (I believe they will), but as far as I've found they don't follow the bid down.

Hope that helps.

 

TradeCourse2,

I agree that it is easier to short than maybe it used to be, but the ARCA features are nice so you don't have to keep placing and cancelling orders to get the fill. Of course you would have to consider how low you're willing to go before you place your order but think how fast all of this happens. If you placed an offer and the market moved away, you'd have to cancel and re-place your order. And with all of the fast competition out there trying to get the fill, you don't have to worry about being faster than the other guy to hit the bid. Your order is sitting there right above the bid so it's likely to get hit.

Valid points all around though.

 

FIrst to SallyBoys question in his first post about ISLD allowing to short a bid uptick...yes ISLD will let you do that as it should. YOu should only get the "order must be .01 above the bid" (or what ever it says) warning message if you are shorting at the bid on a down bid. If the bid is an up bid, then you can short at any price you want. See my (too long) post above. Regarding other ECN's, Redi will work the order essentially like ARCA in that it will adjust the price to a penny above the bid as long as the bid is a down bid, and re-adjust it (assuming you entered a limit away or market order) as the price moves lower.

INCA will also act in similar fashion, however it will only try to match you internally in the INCA book rather than going outside to other ECN's and/or SuperSOES as with Arca/REDI.

 

I use ARCA all the time in exactly that fashion. And when the occasion arises whereby a big time sell-off is underway I will use that sniper method of waiting for that bid arrow to go up for a split second on an ECN up bid and then fire off a short sell below the bid where there is more liquidity. Often I can get short even as the sell off continues, and I could rarely do that before decimals/supersoes.

 

One alternative way to shoring is to route via Instinet. It will chase the bid down until filled. Disadvatage is that it will not cross market makers. Prior to SuperSoes it was the most effective way in my experience, but now ARCA seems to be the Dog on the street

God bless them reserve orders and change orders for free. It allows me to be very "creative"

 

Can you believe we used to actually get a 72 share partial on a 1000 share order via ISLD, cancel the remaining order and re-enter it at a new price, get another partial and do it again (market moving away), and pay $23 each time in the process! Moreover, we did not really think about it until at the end of the day when our P & L said $784....but after commish it was -$236 LOL.

Now its "oh man a partial and the market moved away...no problem" then hit alt P for my bump hot key and instantly revise the order price at no cost. That truly rocks.