Quote from DaveN:
Well, there are probably more, but I wanted to chime in and make this distinction. I've seen traders using both styles successfully and both call it "enveloping."
In one case, a trader will put out some bids and offers away from one or many more volatile stocks. The intention is to catch a trade through driven by one of several events. Something like the late morning "clean up" of a large order is ideal because it will really spread that bid or offer, you get filled, then the stock reverts back to it's original level because the buying or selling pressure is gone.
Clearly, the above method is safer during a rangebound or choppy market. There's certainly risk.... any new trader ought to approach this very carefully. Another way you can catch a trade through is right before some news breaks on a stock or worse, it gets halted. Guess what? You'll be on the wrong side of that move. That's one of the dangers of trading a very large basket in your envelope program: you can't really follow the individual stocks very carefully.
As far as canceling orders that are resting in the market, I'd be cautious there as well. Here's a personal story that I hope will help make the point. Several days of the week, I sit in a trading office in which several of the traders run live news feeds, others have briefing.com, and we have squawk going. (I purposely leave out Bloomberg TV or CNBC because we all know that for breaking news...well...enough said.) I trade Citi during the day. On this day, I was enveloping Citi. It had been weak relative to the market for the last hour or so, and the market was rangebound. Citi was trading around xx.79, and I had a short offer in the book at xx.87. I became aware that something was up almost a full two minutes before the SPoos exploded in chaos and any of the news services picked up the story. How? Well, I went to *lower* my offer to .84 because Citi just wasn't trading up, and I was getting a bit more aggressive on entering short. That order just locked up. No cancel, no response, just locked. Then everyone else in the office starting screaming about their orders, and the SPoos began rockin'! There was a rumor that Osama bin Laden had been captured. I was filled short at my xx.87, just as I had been planning, but now two or three prints later, Citi was offered almost 70 cents higher. Ouch! (Citi has only medium volatility, so you can imagine what some of the other stocks did....)
For the record, that trade hurt, but I have no problem with it whatsoever. These things happen and will continue to happen. It's part of our profession. I didn't make my 70 cents back in Citi that day, but I did over the next week. So, whether you are "sized up" on just one or two stocks or trading 400 or 600 shares across a large basket be aware and be prepared for these sorts of events. Yes, you'll take a hit. Yes, it'll be expensive. You'll deal with it and keep trading. That's the key, make sure that you can keep trading...don't be oversized for catastrophe with this method. It won't be the system's fault, the exchange's fault, or the firm's fault. Be aware of the risk, and you will take the responsibility. If you are prepared for all of that, then definitely look at enveloping. There is clearly an upside to this method, just keep the whole picture in view.
