How do tracking stocks work?

R

rfoulk

I've been trading for a while but I don't really understand fully how tracking stocks fit into the scheme of things.

For instance, how does the QQQ work?

With a normal stock a market maker or trader with lots of shares (or the appearance of lots of shares) can move the price up or down. This clearly can't happen on the QQQ.

So how does it work? Who controls it and how? What are the rules?

QQQ is traded heavily on Island. I often buy at the bid with other stocks. Does this make sense with the QQQ?

What are the tricks to trading these stocks effectively?


Thanks

Richard
 
These stocks often lag. Especially the holders. That's the best way to trade them honestly. Like smh to trade the semis which have been nuked this week.. that way you wouldn't have to bet on which recovers the most. just buy a few k of bdh instead.
 
Hi,

for indepth information about the Q's, holder stocks, iShares etc. go to :

http://www.amex.com/indexshares/index_shares_over.stm

http://www.amex.com/indexshares/index_shares_broad_based.stm

and

http://www.holders.com

http://www.ishares.com

http://www.streettracks.com

Besides supply and demand in the stocks these baskets are made of, each basket-stock has it's own supply and demand.

Therefore, you'll find frequently imbalances between the theoretical "NAV" of the basket and the price the basket is trading for.
You will also discover, that the bid / ask spreads in basketstocks are somewhat larger as in the underlying stocks.

Q's are also heavily used by institutionals for hedging purposes ( you can sell them short even on a downtick ) and sometimes arbitrage-trades. Thus the high liquidity compared to NAZ futures.

Hope this helped a bit.
 
rfoulk,
think of the trackers as an index (they are simply a basket of stocks that trade like a stock). If someone was to push the price out of line an arbitrage opportunity would exist where you could buy/sell the tracker towards fair value against the basket of stocks that make up the tracker. Thus if a specialist or anyone moved the price significantly out of line, they would quickly get burned.
 
Tracking stocks like SPY (S&P500), DIA (Dow), and QQQ (Nasdaq-100) are unit trusts. They spontaneously create blocks of shares as required. The unit trust maintains a portfolio of the related index's component stocks in proportion to the number of tracking shares outstanding.

The stocks will track the indices at SPY=S&P500/10, DIA=Dow/100, and QQQ=Nasdaq-100/40. Trading them is like trading the index. I believe these need to trade in whole lots.

Holdrs are a little different but conceptually the same. A Holdr stock isn't necessarily linked to an index, just a portfolio of specific stocks the creator of the Holdr has selected. Trading these is like trading a defined basket of stocks. Because these are not based on broad indices, you should verify that the basket of stocks being used are ones you want to be trading.
 
As for trading the QQQ, it is not very volatile. The volume is big, 40-60M shrs/day. If you are used to trading stocks that move a lot (AMCC, BRCM, JNPR, BRCD, ITWO, HGSI), then you will be disappointed with the movement of the QQQ.

The good news on trading QQQ is that you can select it thru ISLD and get instant executions vs 1-2 mins on AMEX. The other good news is that ISLD spreads tend to be bigger, therefore a bigger opportunity to make a profit on a day trade. I also like the fact that you can short it on a downtick and at the bid or below (I've done it routinely).

If the NAZ is making a big move, nice profits. iI it's not, well it will not provide much profit. You must trade large lots in order to make any sense (1000-2000 shrs).

.02 :-)



 
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