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Since market-making-style traders utilizing ECNs do not have the ability to pay for order flow, it stands to reason that only better pricing will entice the other side of the trade to come to them. As spreads tighten, market makers will be less ready to pay for order flow because they will be forced to compete with the superior prices being posted by ECN participants. The hope is that this phenomenon will make paying for order flow uneconomic and create an atmosphere for a truly competitive marketplace where orders will automatically route to the best prices, regardless of who is posting them. The only criterion should be the validity of the quote and the assurance of a consummated transaction. |
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Market-making-style traders will also utilize this competitive bid and offer technique in conjunction with the "putting your money where their money is and not just where their mouth is" scenario. It works because while the market-making technique means that the other side of the trade comes to you, you will still be able to initiate the execution of trades electronically through DAET. Therefore, if you are willing to stay liquid and cut your losses quickly, you can control your positions through DAET and not wait for someone else to initiate against your bids and offers all the time. |
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Many traders, the ones I believe do best, employ a low-tolerance, high-velocity (LTHV) trading style. This means they get in and out of their positions very quickly and have a very low tolerance for loss. These traders watch many actively traded stocks, get in fast on seeing a trend developing, grab a quick eighth or quarter point, and say good-bye. If they cannot get an eighth, a sixteenth will suffice. If even that does not come and the trend appears to be reversing, they will sell out flat or even at a small loss almost immediately. They realize one thing: Stocks do not "wear out"; you can trade them over and over again and they remain the same. If the LTHV trader gets out too soon, she or he can reenter once again; the "trend must remain their friend." This style requires constant focus and attention. It is called grinding because the |
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