An NYSE Scalper's Tale - A Trader's Diary

Sunday, February 26, 2006

Some Terms and Definitions

NYSE vs. Nasdaq

First I'd like to point out a difference between Nasdaq and NYSE stocks. Nasdaq stocks are those that have stock symbols with 4 letters in them - i.e. Microsoft (MSFT), Google (GOOG), Cisco (CSCO). Stocks that have 3 letters or less in their stock symbol are most likely traded on the NYSE (though they could trade on the AMEX). They also work differently as well. Nasdaq is completely electronic - this means all buy and sell orders are sent in and matched electronically.

On the NYSE however, each stock has someone called a specialist. The specialists' main job is to match up buy and sell orders and provides orderly markets. Most buy and sell orders go to the specialist and he will match them up accordingly. In a way, each stock can act slightly differently from each other depending on the specialist.

On the Nasdaq, there are lots of market makers (the likes of Merril, Goldman, and Morgan) providing liquidity (while also trying to make a profit) and I personally feel that it's a little more difficult to read all the market makers. However, on the NYSE, you only have to deal with one person - the specialist.

I'd also like to mention ECNs (Electronic Communication Networks), which are electronic marketplaces where one can buy and sell stocks. There are several ECNs (Arca, Brut, Island, SuperMontage) and provides another avenue of buying or selling stocks. The prices on the ECNs reflect those at the NYSE, but sometimes the prices on the NYSE move faster than the ECNs (but sometimes ECNs try to move ahead of the NYSE price), which means one can take advantage of this. I take advantage of this when a large level breaks and there are still some ECN shares that have yet to be filled or removed.

Thus, I have two ways of sending my orders - either directly to the specialist (via ISI), or I can send them to any of the ECNs.

Also, on the NYSE, there is the possibility of "price improvement". This means you might get a better price than what you had expected. An example is if I had a sell order at $1.00 and the specialist fills me at $1.05 (which is 5-cents better than what I wanted). This example can occur if there is a large influx buy orders. Note that price improvement can only occur if the order goes to the specialist (ECNs do not have price improvement).

I'll assume most of you out there have some basic terminology (i.e know what long/short, bid/ask are), so I'll define the less common terms that I will be using throughout my blog:

Gross - the amount made before all fees
Net - the amount made after all fees
Loss From Top - the amount lost from peak net profit
ECN (Electronic Communication Network) - see above
Level 2 - where traders can see all the bids and asks at all the different price levels. It's here I can see the different sizes (see below) and can determine if a level is a good support/resistance level.
S&P Futures or Futures - refers to the eMini S&P Futures and in a nutshell, it's a value of the overall market. If the Futures goes up really fast, most stocks will also go up. Thus, we can use the S&P Futures as a leading indicator (of course, you've got to be quick and you must also be wary of stocks that are not following the futures).
Rip - means going up really fast
Tank - means going down really fast
Print - refers to the fills (orders that are matched); in the old days, orders that are matched were "printed" on a long strip of paper, hence the term
Fill - a matched order
Partial Fill - a matched order, but not for the entire amount requested; an example, let's say I wanted to buy 1000 shares, but I only get filled for 500 shares - I've just been partially filled
Size - when I talk about size in my posts, I refer to "lots" or 100 shares. For example, if I say there is size of 1 on the bid, it means there are 100 shares on the bid. If I say there is a size of 5000 on the bid, this means there are 500,000 shares on the bid
Odd lot - refers to sizes that are not at rounded 100 share figures; you will usually get odd lot fills on ECNs. A few times I've been filled for 1 share, or something like 19 shares, which is really frustrating.
Arca - an ECN
Brut - an ECN
Island - an ECN
SuperMontage - an ECN
Uptick Rule - means that in order to short a stock, you must wait for the stock to first move up at least 1 cent before you can short it. All stocks on the NYSE adhere to the uptick rule except for those on the SHO List (see below). I generally hate shorting stocks that are not on the SHO list because of the uptick rule.
SHO List - is the list of stocks that do not have the uptick rule applied to them. This means one can short the stock as easily as one goes long. This is currently a pilot project being run by the NYSE and will be ending April 28, 2006. Not sure what they'll do after that date, but many suspect they might broaden the number of stocks on the SHO list.

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