How does "Market Open" affect your trading

[jimclark]

Quote from Don Bright:

1. You don't "know" - and you don't really care, that is why you put in buys and sells (shorts) on each stock at your predetermined prices. Only if the stock "gaps" do you get filled, the other orders are automatically cancelled.

2. Spot price (spx) was about 1426.84, I add today's FV of 10.56 equalling 1437.40, the futures were trading at about 1434, meaning the overall market would open down about .0024%. I adjust closing prices down by that percentage, and then place buys a bit lower, and sells a bit higher (varies depending on several factors like beta, sector, etc.). My orders were 2,000 shares to buy at 45.89 and 1,000 at 45.38 (only filled on the first 2000). My short sells were 46.34 and 46.53.

Now a bit of a warning to retail traders. Most brokers won't allow you to place buys and sells on the same stock at the same time, and some won't allow opening only orders at all. This strategy is very capital intensive, but low risk, medium to high reward, especially for time spent.

Don't go "willy-nilly' into this without proper homework and hopefully good spreadsheets.

All the best,

Don

Don I am trying to put your 2) point in numbers, correct me where I am missing:
1) Spot price (spx) of 1426.84 + FV 10.56 (from http://www.indexarb.com/index.html) =
1437.4
2)1737.40/1434 = 1.00237%... 0.0024%
3) But diving WMT closing price of $46.16 by 1.0024% gives $46.06 but your buy price was $45.89...

Did you simply reduce it from $46.06 by few cents?

Short formula is 46.16X1.0024%=$46.27 but your is $46.36..Again, did you simply up your short price by few cents?

Thanks.

 

[pjbreen]

Quote from jimclark:

Don I am trying to put your 2) point in numbers, correct me where I am missing:
1) Spot price (spx) of 1426.84 + FV 10.56 (from http://www.indexarb.com/index.html) =
1437.4
2)1737.40/1434 = 1.00237%... 0.0024%
3) But diving WMT closing price of $46.16 by 1.0024% gives $46.06 but your buy price was $45.89...

Did you simply reduce it from $46.06 by few cents?

Short formula is 46.16X1.0024%=$46.27 but your is $46.36..Again, did you simply up your short price by few cents?

Thanks.

jimclark,

I didn't check your math, but assuming 46.06 is the correct FV opening for WMT there is no edge in trading it at that price. This strategy is attempting to buy at a discount or sell at a premium to that theoretical FV for WMT. So once you have the FV price, you apply a premium / discount usually in the range of .2 - 1% to give yourself a theoretical edge in taking the trade.

Lescor,

You said- In a very low interest rate environment with a low dividend yield on the index, the cash can actually trade with a premium over the futures.

I think it would be a high dividend yield. I think for cash to trade over the futures you would need remaining dividends to be greater than the financing cost of the cash position. So I think it would take a combo of low rates and high dividends. Does that make sense? Never seen it happen so not sure...

 

[ElectricSavant]

Don...do you teach this in boot camp?..whats this automated program?...do your traders get that too?

Quote from Don Bright:

Sure...simple strategy that I've used for decades. All night long the NYSE receives orders to buy or sell shares on the opening, at the opening price, regardless of what the price may be. For example, there may be 500,000 shares to sell of WMT and 350,000 shares to buy of WMT (at any opening price). This leaves an imbalance of 150,000 shares "extra" to sell. The Specialist looks in his "book" for buyers at lower prices until he can fill the order (and he Must be a buyer as well in this example). So, like this morning, WMT opened at 45.82 (down 34 cents. I had a buy order for 2,000 shares at 45.89 (based of FV calculations), and bought 2,000 shares at the opening price of 45.82.

At this point, my automated program puts in a sell order for 25% (500 shares) up 6 cents. I sold 500 at 45.89, and the other 1500 shares at varying prices up towards 46.00, making about $250.00.

I put in buys and sells on around 50 stocks each morning, at various "envelope" levels, and share sizes. Generally, I put in 2,000 to buy and sell at one envelope (say half of 1 percent on each side of calculated estimated opening price based on FV). I put another 1,000 shares to buy and sell at a wider envelope, just in case the stock really gaps a lot.

Very simple, we are trading on the "same side as the Specialist" since he must "accomodate" the opening orders from the needed side. Why not make money with the guy who's been making money for 200 years?

There is more to the strategy, and people generally add some nuances of their own, but I figure it should be worth $50K-$100K per year for an experienced trader.

Hope this helps,

Don

 

[ElectricSavant]

This has got to be the clearest explanation I have seen, about what Don trades. It is not complicated and it makes sense...Just do what the Specialist is doing...

250 bucks a day aint bad...for a few hours work...Heck, trade Forex, the rest of the time...

Thanks!


Sure...simple strategy that I've used for decades. All night long the NYSE receives orders to buy or sell shares on the opening, at the opening price, regardless of what the price may be. For example, there may be 500,000 shares to sell of WMT and 350,000 shares to buy of WMT (at any opening price). This leaves an imbalance of 150,000 shares "extra" to sell. The Specialist looks in his "book" for buyers at lower prices until he can fill the order (and he Must be a buyer as well in this example). So, like this morning, WMT opened at 45.82 (down 34 cents. I had a buy order for 2,000 shares at 45.89 (based of FV calculations), and bought 2,000 shares at the opening price of 45.82.

 

[jimclark]

Quote from lescor:

Thanks for posting this Don. I get so many people asking me to spell out the basics of opening orders and I can't find the old old threads that talk about the specifics. So I'll add some of my own info here and then bookmark it for future reference.

"Where do you find fair value, and what is it"?
http://www.programtrading.com/buysell.htm
or
http://www.indexarb.com/
The numbers aren't exactly the same, and you can use either one, just try to be consistent in which one you use.

Fair value represents the premium of the futures contract to the corresponding cash index. We are generally comparing S&P 500 futures (contract SP or ES) to S&P 500 index. Futures will usually trade at a premium to cash because of the cost of carrying stock vs. cost of a futures contract.

For example, if you want to buy all the stocks in the S&P 500 in the right ratios, you will have to lay out several million dollars. There is a cost to doing this, namely the interest you can earn by putting the same money in a risk free government note, the risk free rate of return. However you will also earn dividends on the stocks you own.

When you buy a futures contract on the same stocks, you put up much less money to control the same amount of stock. Therefore you can earn the difference in interest, but you aren't entitled to the dividends.

Into all this you have to factor how much time until the the futures contract expires (they are dated either march, june, september or december and expire on the 3rd friday of those months). With 3 months to expiry, you have to finance a cash position longer, so the futures premium will be more. At expiry, the futures contract should trade at the same price as the cash index. In a very low interest rate environment with a low dividend yield on the index, the cash can actually trade with a premium over the futures.

"How do you calculate your buy and sell prices"?

Armed with the fair value number for the day (the 10.56 Don referenced above) we can look at where our cash index closed yesterday, where futures are trading pre-market and we can estimate where the cash index will open. From this we can estimate where each stock "should" open as well. Remember to account for dividends, stock splits and the like.

In a nutshell you are fishing for stocks that open too far away from where they "should" for no apparent reason other then some kind of buy/sell imbalance. The thinking goes that the stock will revert towards it's fair value price after the open. How big of a gap is big enough is an open ended question. Smaller gap = lower odds but more opportunity, wider gap = better odds, fewer trades. Most people are somewhere in the .3 to 1% range.

"What about beta"?

Some use it, some don't. It probably does not make a big difference. I multiply the stock's beta by the size of the market gap when calculating the stock's fair value.

"What about news affecting a stock"?

If there is some news event that is causing the imbalance then that may be a whole other kettle of fish. Some people trade this strategy with no regard to news, some spend an inordinate amount of time to remove all stocks with news before the bell. Your call.

"What is an 'opening order', can I use an ecn"?

Your order must be marked as an "OPG" order type. This is a special type of limit order that will either execute on the very first print of the day, and if not executed will automatically cancel. Your orders need to be with the specialist prior to the open, so routing via an ecn won't work.

"How do you know what stocks to trade"?

You send orders on the same stocks every day. Some people will avoid sectors that are not correlated to the S&P 500, like gold and energy.

"How do you enter all your orders, when do you send them"?

You will likely need some kind of basket function in your software or a macro to read your spreadsheet and send your orders. If you only have a handful of stocks you could enter them manually. Send your orders any time inside of 10 minutes to the bell. You can send them sooner, but if the futures move a lot from where you sent, your prices could be off significantly.

"What about exits, do you use stops"?

Once you are in, it's just trading 101. This strategy only gives you an entry with a very slight edge. There is no magic bullet or hard and fast rules how you get out, how you control risk, where you use stops, etc. There is also opportunity cost to consider as the opening is when stocks are most active and this strategy requires attention, so you may miss out elsewhere.

If you have more questions, post them here so we can basically have a FAQ for this strategy. I get tired of typing the same thing repeatedly in emails and pm's.

I realize the OP may not have been refering to opening orders specifically, so maybe we can summarize this in the opening orders thread.

You explained perfectly. Just called IB...looks like I had to enable "OPG" order type, no wonder I never seen it before, plus order needs to be in 15min prior to trade.

One thing I need to work on is how to combine this strategy with my trendfollowing, momuntum trading. I think I'll do my regular due diligence in the evening and will place trade at the open based on where FV is heading.

THanks.

 

[lescor]

Quote from pjbreen:



Lescor,

You said- In a very low interest rate environment with a low dividend yield on the index, the cash can actually trade with a premium over the futures.

I think it would be a high dividend yield. I think for cash to trade over the futures you would need remaining dividends to be greater than the financing cost of the cash position. So I think it would take a combo of low rates and high dividends. Does that make sense? Never seen it happen so not sure...

You're right, I typed that wrong, I meant a high dividend yield. When fed funds were in the 1-2% range a year or two ago, FV was a negative number.

 

[lescor]

Quote from jimclark:

You explained perfectly. Just called IB...looks like I had to enable "OPG" order type, no wonder I never seen it before, plus order needs to be in 15min prior to trade.

THanks.

They're wrong on the 15 minute thing. You can submit right up until the stock opens, even if it is opening late.

The common understanding around here is that you had to have your orders in two minutes prior to the open to be ensured a fill you are entitled to. I have scoured the nyse rule book looking for this 'two minute rule' and can't find anything. Sometimes when I'm running behind, my orders are still streaming in as the bell goes off. As long as the order makes it to the post before the stock opens, I'll usually get the fill. There are rules based on size and time priority though. I quite often see the stock open right at my price with no fill, or only a partial fill.

 

[jimclark]

Lescor,
you said you trade same stock everyday, if you want to.

What about combining this strategy with momentum trades? I wonder how likely for stock to dip (though happens often) when it's in bullish mode and you can see bullish and volume and pressure building up. I'll test it to tomorrow and see.

 

[jimclark]

Early mornings Yahoo Finance has data on Spot price (spx) and where Futures are trading.. Also I watch Bloomberg online and they aslo provide this info.

What is a one "perminant" place I can check for this data prior to market open?

 

[lescor]

Quote from jimclark:

Early mornings Yahoo Finance has data on Spot price (spx) and where Futures are trading.. Also I watch Bloomberg online and they aslo provide this info.

What is a one "perminant" place I can check for this data prior to market open?

The spot price, or S&P 500 cash, is just where the index closed the previous day. Every financial website and data feed will have this. For futures you will want to use the emini, contract symbol ES. If you are relying on delayed data for this, your prices could be off significantly by the time the market opens if the futures have moved even a couple points. You should have real time ES prices, from your execution platform or charting service.

Like I said, there are lots of ways to trade once you're in. This just gives you an entry, after that it's all you. I submit orders from the same list of stocks each day. The number of fills will vary day to day, some days maybe 20% of orders are filled, some days none. This could be an insurmountable hurdle if you are trading in a retail account. You do not know how many positions you are going to have and how much capital it will require. Most retail brokers will count every open order against your margin, so you could run out pretty quick. It can be a very capital intensive strategy, which is why it's best suited to prop accounts.