SuperSOES and Electronic Minis

DaveN

DaveN

I'm going to pull ideas from a lot of recent threads to try to "frame" my question.

Several people have talked about the proprietary advantage of low commissions @ 1 cent per share or even less.

From the new thread on SuperSOES, I'm getting the impression that many NASDAQ stocks will be moving very closely with the futures, no lagging anymore. I'm referring to the MM's moving quickly along with the ECNs to follow the price action--i.e. more volatility. Individual traders will be able to arb or "clip" MM's, which will soon ensure that their prices move more quickly.

Because I trade index futures contracts, I don't worry about shorting on downticks, I enjoy great liquidity and instantaneous executions, and at tax time, I can take 60% of my profits as long term. By my estimates, a single mini futures contract controls between $25K to $60K....or the equivalent of 1000 shares of a typically priced stock. An IB or ELocal commission will run the equivalent of about 1/3 the 1 cent commission or less that everyone is talking about. So, at month end, my trading costs are much lower.

Here's my question: What am I missing about the advantages of trading NASDAQ issues? Is it a preference that traders have, or is there some compelling reason that I'm not grasping? I'm worried that I'm not seeing something.

I'd love to hear any ideas. Thanks!

DN



 
I don't think you are missing anything.. The only advantage of trading stocks is that there is more selection -- i.e. you are stuck with a few index futures while daytraders can choose from hundreds of liquid stocks. IMHO, there are also more suckers playing stocks (read: easy money), while the futures traders tend to be more professional (and harder to extract $$$ from). I never understood how the leverage that prop firms give is such a big advantage, since you can play futures and get tons of leverage (and usually better liquidity) anyway. However, I do appreciate the extra liquidity and volume that is provided by all those traders at prop firms :)
 
I don't think you're missing anything either. E-Minis are probably the best trading instruments currently in existence, and you only have to watch one or two of them, giving you the ability to become intimately familiar with their movements and gyrations, as compared to having to keep track of large numbers of possible stocks.
 
DaveN,

Would you mind expanding on the tax implications of trading the e-minis? Specifically, the 60% as long term gains? Thanks.
 
DaveN,

The only advantages of trading equities that I can think of are:
  • as mentioned, much of your trading opposition is not, shall we say, completely professional in experience or temperament
  • you can short on a downtick if you trade with a proprietary firm, whereas most equity traders can't (a real edge)
  • many equities often make much stronger moves than indicies
With that said, e-minis are sounding more 'n more appealing to me!
 
Originally posted by TallPaul
DaveN,

Would you mind expanding on the tax implications of trading the e-minis? Specifically, the 60% as long term gains? Thanks.
More...

TallPaul,

"Broad" Index Futures contracts are covered under Section 1256 of the Internal Revenue Code. The S&P and NASDAQ100 qualify as broad indicies, while it appears that Single Stock Futures will not.

Section 1256 provides that all gains and losses incurred as a result of trading certain futures and options contracts will be treated as 60% long term and 40% short term, regardless of holding time. There's a year end mark-to-market provision for any open positions as well. If you want all of the ugly details, check out http://www.currentlegal.com/statdocs/37827.html

So, in my case for very short term trading of electronic mini's, I will take my P&L for the year (or on a quarterly basis if you are making estimated tax payments), and calculate taxes owed at a much lower overall tax rate than if I was calculating my gains as regular income.

I state this as a trader. I'm not a tax professional, and I don't purport to offer this as tax advice. The usual statement about consulting a tax advisor who specializes in trading would *definitely* apply here.

DN
 
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