Why actively trade ETFs?

Quote from deronwagner:

Hi Dave,

To answer your first question about order routing, I generally use ARCA, which is probably similar to IB's BEST order routing. ARCA first looks for an order match within its own order book, but then goes out to the other ECN books, and finally the NYSE if it cannot find any matches. Using ARCA usually enables me to get a decent fill, except with ETFs that have wide spreads (such as RTH, PPH, or TTH). In those cases, I just use limit orders.

I can't tell you why your order took so long to get executed because I am not familiar with the design of IB's BEST routing. Perhaps a call to them would be helpful.

As for SMH, Peter answered your question well. SMH will generally follow the SOX, but the components are not exactly the same. Therefore, you will sometimes have a discrepancy. I recommend you check out www.holdrs.com to see the exact components of SMH. You will then know what to expect with movement of SMH, based on the direction of the leading stocks.

As for MMs not playing games on the bid/ask, I cannot tell you that this does not happen. However, my point was simply that it is irrelevant because an ETF is always going to move in correlation to the exact prices of the underlying stocks that comprise it. Therefore, even if there are no trades going off, the bid/ask will rise in proportion to the fair value of the ETF. Otherwise, arbitrage traders would take advantage of the discrepancy.

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Thanks for the reply, Deron

Some comments and one question...

I will relook at IB's BEST order flow sequencing. I know it is much more than simply trying ARCA internally first. With Nasdaq stocks, I didn't need to know the BEST order fill sequencing - if my limit order was at the inside market, I was filled in 1 second (unless the market immediately moved away from me). On several occasions with SMH, if the best bid or offer was other than Island, my order has sat there for seconds, even when the market didn't move. This isn't an IB Best order routing issue - I suspect this is an unavoidable situation with ETF's (vs Nasdaq stocks) with specialists now involved. It seems I now have to think about order routing, whereas I didn't before.

Related to this, it seems that Island bids/offers do not appear in Level 2 together with the exchange quotes (unlike nasdaq stocks, where the best Island bid/offer appeared under MMID cinn). Now it seems one needs to watch Level 2, plus keep the Island book open (and in your case, the ARCA book). All in all, I can see how trading ETF's favors a slightly longer term approach, where instant in an out isn't as important as in day trading. That's fine, I'll just have to learn to deal with it.

Regarding SOX as a leading leading indicator for SMH, I understand how SOX and SMH components differ. Just knowing the general direction of key SMH components seems too general though, and not many people have enough monitors or eyes to watch the charts of the top SMH components. Maybe a watch list with top SMH components and other top semis, sorted by % gain would work. If the SMH components had the best % gain, then SOX should be a leading indicator, otherwise, not so leading.

My question was regarding your last paragraph. You said " .. even if there are no trades going off, the bid/ask will rise in proportion to the fair value of the ETF". Are you saying that if the composite prices of the SMH components advance a certain amount, that the inside market for SMH will automatically rise a related amount, i.e automatically lifting all offers necessary to rise as much as needed to align with its components? Some person (or AMEX?) has to be taking the quoted offers? Can you clarify how that works?

Thanks again for your insights
dave z
 
Quote from davez:



....

My question was regarding your last paragraph. You said " .. even if there are no trades going off, the bid/ask will rise in proportion to the fair value of the ETF". Are you saying that if the composite prices of the SMH components advance a certain amount, that the inside market for SMH will automatically rise a related amount, i.e automatically lifting all offers necessary to rise as much as needed to align with its components? Some person (or AMEX?) has to be taking the quoted offers? Can you clarify how that works?

Thanks again for your insights
dave z
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Hello Dave,

you are right. If underlying components price rise then also adequeste index for SMH (ISH) is rising, so bid/ask in SMH will rise.

You can see it much easier on less liquid ETFs like WMH,UTH, TTH. As their index value is moving then also ETF's bid and ask are moving in the same way.

Happy trading,
 
tradersaavy,

I like PPH a lot. In fact, we bought PPH this morning at 74.20, based on a break of the primary daily downtrend line, a double bottom, and break of moving average resistance. Individual leaders of PPH showed great volume on the reversal yesterday, which is indicative of sector rotation into the drugs, which have been lagging the broad market. If the broad market corrects, we will probably see money flow out of the techs and other strong sectors and into the drugs. We are long PPH at 74.20, initial stop at 73.10, and target of 75.65, which is the 200-day MA.

As for OIH, I see the weekly support you are looking at, but the sector has not been trending too well lately, which has made it difficult to stay long through the day to day reversals.

FYI, we also shorted RTH today, which is finally breaking support due to WMT's missed earnings. Target of the 50-day MA on RTH.

Deron
Morpheus Trading Group


Quote from tradersaavy:

What are your thoughts on PPH and OIH currently.

Both are at weekly/daily support.
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I am posting here the same text I posted into FREE ETFTrading Discussion Forum on http://www.traders.cz/phpBB2/index.php?language=english. I will be pleased to discuss ETF Trades, setups, strategies, etc in this room , feel free to enter the room. Charts are posted in the room, you can find them there.

******** begin **********
I would like to comment current situation in broadbased ETFs, which are representation of major US indices.

US markets are in multi-month uptrend. Comparsion below can help for decision what broadbased ETF is best for entering long position now.

First chart compare relative performance of these broadbased ETFs in last period of time:

DIA ... Don Jones Average (INDU)
SPY ... S&P500
QQQ ... Nasdaq 100 Index
IWM ... Small Caps - Russel 2000
MDY ... S&P MidCap Index

There is evident that MDY is best performer and QQQ is worst one.


So MDY is best ETF for entering new long position now. Second chart of MDY shows nice uptrend line which could provide nice support together with 20day EMA and horizontal support in area of 100 - 101 USD. Also positive volume is stronger then negative volume, so it is next additional argument for long entry. Somebody can also wait for candlestick, which will indicate end of correction to find more precise entry point.

Stop have to be placed in 97 USD area, because retracement to this are could indicate that current uptrend can be finished (almost temporary).

And what is your opinion ?

********* end ***********
 
FYI, we are targeting BBH for a potential swing trade on the long side today. After months of lagging the broad market, the Biotechs and BBH showed relative strength yesterday. BBH in particular closed above its 50-day moving average for the first time since October 14. It also broke the upper channel resistance of a downtrend that has been in place since September 19. Finally, it broke above horizontal price resistance from the past several months. Most importantly, volume in the leading components spiked higher yesterday, which we expect to lead to more gains and a retest of the prior highs around 135. The daily chart of BBH below illustrates yesterday's breakout:

BBH031202.jpg


Our buy stop is at 130.58, just over yesterday's high. Therefore, we will only buy today if this price level is hit. Otherwise, we do not have confirmation of the breakout. Our stop is at 128.50 and the target is 134.90 area. As usual, this is not to be construed as a trade recommendation; we are simply sharing the details for an ETF trade we may enter today. Always do your own analysis.
 
Per the previous post, we bought BBH at 130.60 area this morning and now have an unrealized gain of + 2 points today. As such, we are raising the stop to 130.50 area (near breakeven) to eliminate the risk from the trade. Target still near 135, so we have about 2.5 points to go.
 
BBH just broke out to new high of day, so we are selling half the position into strength at 132.90 area, in order to lock in gain of approx. + 2.3 points.

Also raising stop to 131.50 on the second half of the position.


Just an update for those following along. . .
 
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