Dave: For our members that may not know anything about "opening orders" Please give me a brief tutorial and explain the concept.
Darren: Basically, you are fading opening gaps on the expected price on the stocks open. You are looking at a stock like General Electric. It generally is a market performing stock and it behaves correlated to the S&P 500. You watch the futures contract of the S&P 500 in the morning to see if the futures contract is up .5%, you expect GE to be up .5%. Now if GE opens up 1.5% you are going to short it. You are going to fade that extreme open of General Electric. If GE opens down .5% you would buy it. You would say it opened below where you would expect it to in comparison to the S&P 500.
Dave: You are placing multiple orders above and below the price? So you are basically enveloping the price?
Darren: Basically enveloping the expected opening price. Taking a look at the morning, and we have automated programs that do it, all the way up to about one minute before the opening bell. I will look at if the S&P futures contracts have moved, and the E-minis right now, where I expect the market to open. Using that information I make an estimate of where I think my stock should open, and that is where I envelope.
Dave: Once the order executed, do you just take it for a couple of ticks or do you take it for as long as it will go?
Darren: To do the entry is actually a very easy thing for an experienced trader, once you get into the habit of it. The entry side is always the place where traders have difficulty. This is what being an experienced trader really means. When you do get in to a position, how you manage getting out. There are times where you just take it for a couple ticks, there are times where you pair it off, there are times where you turn around and just take a loss as soon as you can. It all depends what you see on the tape.
Dave: How many opening orders do you throw out in the morning?
Darren: On any given morning I may have 600 open orders out there.
Dave: Wow, obviously this is something that is computerized?
Darren: It all depends on the approach you are taking. Some people who just like focusing on the broad market, and focus the strategy on five different pairs and only five pairs. Everyday they do the same stocks over and over again. But they become very familiar with their stocks. While I am putting an order quite away from the expected opening price, they may be looking at putting it five cents from the expected opening price, and not get in. They become a lot more aggressive to get more fills.
Dave: Let me see if I understand you. You place your order five cents away from the opening price and if you get filled you are betting the momentum would carry that price forward resulting in profits?
Darren: No, not exactly, letâs say you are looking at a stock that closed at $40. You expect it to open at $40.50 the next morning because the S&P is up quite a ways. Then what I am doing is taking a price like $41, and I am shorting. At a price like $39.50 I am buying. If I get the $41 short then I expect it to come back down to that expected open price of $40.50. So in that case I have faded the gap open.
Dave: Man, it looks to me, if you have 600 orders out there, often, when you try to fade a gap, the stock will just keep ripping. Is this the case?
Darren: It happens more often than I would like it to happen. That is when the advantage of being an experienced trader comes in. If I see an opening price of $41 where I have sold it and I notice that, first off, going through that open is an indicator to me that it wasnât as good as I thought it was. It should be that the opening is quite often the extreme for the day for a lot of stocks. So that should be a great trade, I should see some instant gratification there to it and if I donât see some resistance building on that opening price and others arenât coming in and saying âWow, I missed the plane, I need to get it up here at this price,â then it is probably better off getting out. If I do get into a position where it is running hard against me, Iâll find another stock that is sympathetic to it and Iâll buy twice as much to balance out the position and turn a profit.
Dave: Buying the stock that is sympathetic to the one that is ripping against you. Do you have software or some sort of program to instantly locate these candidates?
Darren: I have a quote window on my screen that tells me what all the pairs in a sector are doing. If I do hit something like Citibank, and I am struggling with that open, I can just glance at my screen. If Citibank is up a dollar, JP Morgan is up 50 cents, Bank of America is flat. Well maybe JP Morgan is moving much more sympathetically to Citibank.
Dave: I know that you guys have software that specializes in finding gaps. Tell me a little about your gap system.
Darren: Absolutely. If you take this strategy of enveloping that we have been doing at the open, and carry it forward into the middle of the day. In this case, what you are looking at is gaps. Traders are paid on the NYSE in one of two ways: 1. Finding inefficiency, something that is undervalued or overvalued that shouldnât be. 2. We are trying to take on the roll of a market maker which is to provide liquidity. This is a service to the market, and over the long term you should get paid for it. What we are doing is putting envelope orders out around the last print of the stock, so that if it gaps 20 cents or 25 cents, you are providing liquidity for that gap. This strategy is something that, especially if you go back to the late 90s, early 2000 period, the way that the market was behaving, was probably one of the most successful strategies that was there for our traders. They were able to provide liquidity in situations that were trading, and if things did not work they had the other side to sympathetically use to make sure they were not getting overly hurt.
Dave: This has been a very insightful conversation. Is there anything you would like to leave us with?
Darren: We do offer some mentoring and training up here with our company. You can look at our website
www.pairtrader.com . There is a group of us, so feel free to look us up. We are always looking to improve what we are doing and to help the trading community.
Dave: Do you have remote traders?
Darren: Absolutely, we have traders all across North America and some internationally.
Dave: To trade in Canada, do you need to have a series 7?
Darren: Yes, you do need to have a series 7. Currently the only province we have license to trade in Canada is British Columbia and that is because we all trade through Bright. That is the province Bright is licensed to trade in. We do have a number of traders here. Our Langley office is actually our second largest office.
Dave: What is the minimum capital contribution from a trader?
Darren: A mentor trader through us is $10,000 as a minimum capital contribution. You do come spend two months time with us in British Columbia.
Dave: Thank you very much for joining me, Darren.
