Scalping "Outside" in a post-DOT world

Discussion in 'Trading' started by ItermBonds, Jan 16, 2009.

  1. I have been away from the trading game for quite sometime.

    A long time ago, when commission rates were not so favorable for average prop traders like they are today; meaning "cheap" and the brand spanking new DOT system was all the fuss at the NYSE.........................

    On the DIA and SPY ETF's, you could see the order book in real time and the dozens and dozens of different entities on the bid/ask. The spread was always tight and always a penny and the volume at a frenetic pace.

    What we discovered though is that you could place a buy order just slightly under the bid for 2 cents and get filled pretty consistently; like five times an hour on 500 to 1000 share blocks. You would then immediately turn around and sell it for the bid price to one of the buyers sitting on that massive yellow colored bid wall and pocket the two cents. The only problem is 8 years ago or so, the commission rates were not that conducive for a two cent rip.

    So present day in a SUPERDOT world with much more favorable commission structures, is this kind of strategy something you could accomplish?? Or in the new era now of routing orders, taking away liquidity, etc. is this little quirk in the system a dinosaur along with the ancient DOT topology?
  2. heh in this maket you can put in orders 30 cents under the bid and get filled pretty quick and consistently :)
  3. Interesting.

    Well let me amplify a bit more on the mechanics of how this played out.

    Imagine you are watching a quote box in real time on the DOT system trading DIA. The bid is $85.50, the ask is $85.51. There is literally a wall of twelve different entities "bidding" and "asking" on both sides.

    You place a limit buy order for $85.48 and get filled. Now at this very same moment in time, that wall of $85.50 bidders is still sitting there. You immediately limit sell your shares to the $85.50 bid price and pocket two pennies. This all happens in a matter of a couple seconds.

    And again if you were quick enough, this was there all day long for you. It did not work every single time mind you. If you saw the bid fading or getting weak, you would cancel your limit buy order and come in lower. It was really like playing a video game of sorts. But when you did get filled, your market exposure was a few seconds at most each time.

    If you were quick enough and willing to grind it out, you could do anywhere from 3K to 6K shares an hour. With current commission structures, that comes out to a compensation of anywhere from $40 an hour to $90 an hour.