How to Capture The Spread
One of the biggest things that I tried to explain to all of my traders is, capturing the spread. I think the most important thing that I can teach somebody is that before you go ahead and buy a stock, number one, know where it's coming from, look at the chart, look at an hourly chart, look at a daily chart and then go back and say, alright where has the stock been doing for the past three months? Look to bid before we buy.
If stock is trading at 1650 or 1675, the average trader out there, the average retail guy would pay the 75, so you're immediately down $250 on a thousand share position. Let's go ahead and buy 50's. One of the great things about Lightspeed is what we could do is, we could go ahead and penny the 50 bid, put in the 51 bid and hide it by going "H" on island. The other thing that we could do is, we could show it on Arca and we could hit reserve so that all we are showing is a hundred shares and even the people that are bidding 50 might want to hit you just to get you out of the way from going ahead in what we used to call teening them in the old days. Now you are bettering their bid by a penny, a penny increment. Go ahead and show a hundred shares even though you have possibly a thousand and save yourself and really, really, really capture the spread.
The other thing is that, all of the ECNs, the Electronic Communications Networks out there, they pay you to add liquidity to the markets. They charge you to take liquidity from the markets. So if you're at a sliding scale and you are paying $5 plus pass throughs or $0.05 plus pass throughs, hey listen, if you were to pay and buy stock on the bid, you're automatically knocking your commission down to three instead of seven and that's huge. A hundred thousand shares a day, it all adds up.
Besides capturing that spread of $0.25, you're also gaining so much more knowledge and you are not just acting on impulse. You are being disciplined, you are showing patience and with that patience, that $250, ten times a day, is a career; it's $2500 a day, it's $12,500 a week; it's $48,000 a month, it's a half a million dollars a year. The only time that you should hit a bid, or take an offer is when you are wrong. Market is going to come into you, you are going to buy it where you want. After you are in the position, you don't want to get out to another buyer an attractive place. Sell into strength, buy into weakness, that's what good market makers do.
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