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

Monday, October 02, 2006

The New NYSE Arca

Gross: +$130.00
Net: +$70.14
Loss From Top: $150.70
Trades: 69
Shares Traded: 73800

Stocks Traded Today (net profit/loss):
Walmart (WMT): +$161.54
Hewlett Packard (HPQ): +$96.24
Exxon Mobil (XOM): +$45.95
Advanced Micro Devices (AMD): +$41.56
AT&T (T): -$17.29
Corning (GLW): -$36.32
Home Depot (HD): -$52.90
Motorola (MOT): -$168.64

As mentioned in a previous post, Arca (an ECN) changed their fees and the new fees took effect today. This was one of NYSE's attempts to attract more volume and is a precursor to the Hybrid market (read about the NYSE's trial run they had over the weekend here).

The new fees for using Arca are as follows:

Add liquidity: 0.002 cents/share CREDIT
Remove liquidity: 0.003 cents/share

Before I continue, let me quickly go over the difference between adding liquidity and removing liquidity (just so that I don't get 20 questions asking me what the difference is).

If you are adding liquidity, you place your order and you wait to get filled. You are adding shares to the book (Level II) and thus you are adding liquidity to the market.

If you are removing liquidity, you are placing your orders at a price that will have you filled right away (you are hitting the bid/offer). You are removing shares from the book (Level II) and thus you are removing liquidity.

Thus, on 1000 shares, I will recieve a credit of $2 if I add liquidity using Arca.
It will cost me $3 on 1000 shares if I remove liquidity using Arca.

Did these new fees have an impact on my trading? You bet your a**!

I put on a trade this morning on 1000 shares and without really thinking about it (actually, I don't know why I did it), I removed liquidity using Arca and when prices weren't going anywhere, I removed liquidity on Arca again! Even though the trade was for break even, that bloody trade cost me a little over $6! ($3 to get in, $3 to get out, plus other fees).

Holy crap! The only reason I punched both times was because shares were available on Arca and I was the fool who punched them!

I guess NYSE's attempt to try to get more liquidity and volume seems to be working! Everybody now wants to get out or get into their positions using Arca!

Throughout the day, I was getting into positions using another ECN (because it's cheaper), and then I was trying to exit my positions using Arca. At one point, my gateway fees were negative! (meaning that a credit was owed to me!).

HOWEVER...this did negatively affect my trading. What would happen is that I'd get into a position (let's just say I got long) and prices would go my way and I'd place an order to get out using Arca. Then I wouldn't get filled on Arca and prices started moving back down and I'd step my Arca order down 1-cent. I wouldn't get filled again and prices moved down again.

I could have exited my position many times at better prices using my regular method, but I was holding out for some lousy credits! Many of these types of positions turned from being a winner into a loser! And all of this for a few lousy bucks!

With these new fees, here are some other things I noticed during the trading day:
  • Sometimes when prices are moving, people just refused to remove Arca shares at certain price levels (because they don't want to pay the fees!)
  • Many times when I wanted to get out of a position, I'd place my order using Arca - but people seemed to be reluctant to take my order out! There was even a time I was the only guy left at a price level with my lousy Arca order - and it was only for 500 shares! I waited and waited and waited and I was still the only guy at that price level and nobody wanted to take them!
  • I am now hesitant to hit Arca when I see a significant level break and there are Arca shares available...and there are a lot more Arca shares available (either because nobody wants to hit them or more people are adding liquidity or both!) - for removing shares, it's $3 on 1000 shares, $15 on 5000 shares, $30 on 10,000 shares - it may not see like a lot, but for scalpers that's HUGE!
Anyways, this new fee structure is just the tip of the iceberg so there's no use for me to fret too much over this. There's going to be a lot more change coming.

You can see that today I wasn't really able to catch any real profits today. I missed that good move made by the overall markets at around 1:30PM (I was out enjoying the beautiful day!).

I did take a bad trade - partially my fault. I got into the position and the trader next to me somehow screwed up some orders and he somehow went long on a Futures contract and he just went ballistic! He panicked and so I helped him out and by the time we had everything straightened out, I totally forgot about my position and it ended up being a loser (see bad trades).

Good Trades

Bad Trades
9:40AM - Motorola (MOT) was uptrending but flattening while the Futures were flattening. Motorola approached the $25.00 level and when it looked like it was going to break, I went long 2000 shares. At that point the trader next to me started jumping up and down, swearing out loud and banging on the desk. He looked to me for help and it was at that point I should have exited my position. I didn't and by the time I came back to it, I was looking at an 8-cent loser. ($160 loser before fees ; In: 9:40:32AM ; Long 2000 shares @ $25.00 ; Out: 9:42:01AM)
  • I don't blame the trader who sits next to me - I should have been smarter and just exited my position before helping out
  • I was already not very confident about this position - the Futures weren't confirming and MOT started looking rather weak


  • That's funny about ARCA. From what you've written, by that fee structure they've succeeded in removing market-order liquidity, butincreased limit orders.

    It also might convey something about the other side of the trade.. if you're sitting on a limit order and someone hits you, they might know something...


    By Anonymous ec, at October 02, 2006 9:09 p.m.  

  • EC,

    Thanks for your comments.

    That's true - only time will tell what kind of impact this will have on the NYSE. For me, I personally like the way credits are setup on the Nasdaq where credits are given to those who REMOVE liquidity. My style of trading involves a lot of removing liquidity (both in getting in and getting out) and so the Nasdaq setup is much more appealing to me.

    Why does NYSE have it reversed? I don't know, but like you said, I can foresee lots of Arca orders just sitting there, staring at each other, neither side budging and no one getting hit, whereas at the Nasdaq, everyone wants shares and so prices and volume move!

    And like you said - when I'm sitting on a limit order and I get hit, my first initial reaction is usually "Crap! I got filled!", which is kind of funny when you think about it because it's really a reaction one doesn't expect when they get filled!


    By Blogger J.C., at October 02, 2006 9:27 p.m.  

  • I think I have been misguided by the defintions of addaing and taking liquidity.
    It was explained to me that taking liquidity is when you buy shares and adding liquidity is when you sell. So I have been trying to buy on ISLD and sell with ARCA.
    Could someone explain if and how I should be using them to be more profirtable via execution fees.

    By Anonymous Anonymous, at October 14, 2006 7:59 p.m.  

  • Anon@7:59PM,

    Thanks for your comments.

    Think of it this way: if you are adding liquidity, it really means you are making more shares available for buying or selling. Thus, if I want to buy shares and I want to add liquidity, I put in an order at the current bid price and I wait and hopefully I get filled. Likewise, if you already have shares and you want to sell them and you want to add liquidity, you place your order at the current ask price and hope you get filled.

    Now, if you want to remove liquidity, it means you want to remove some shares that are available on the bid and ask. Thus, if I want to buy shares and I want to remove liquidity, I'd place a buy order at the ask price - I will get filled right away (I'm hitting size on the offer), and thus, I am removing shares that are available for buying and selling. Likewise, if I already have shares and I want to sell them and I want to remove liquidity, I'd hit size on the bid (so that I'll get filled right away).

    Currently, the BEST way to get in and out (execution wise) is to place all buy and sell orders using ARCA to add liquidity.

    Best way for getting long: Let's say I want to get long and the bid is $1.00 and the ask is $1.01. I'd use ARCA and place a buy order at $1.00 and wait to get filled (if I do get filled). I'm adding liquidity in this case (I'm making more shares available at $1.00). Now lets say you got filled, prices move up and the current bid is $1.05 and the ask is $1.06. I would get out using ARCA by placing a sell order at $1.06. Again, I'm adding liquidity (adding shares that are available at $1.06). The result of this trade is that you'd get a CREDIT for it (you added liquidity on both orders). If I were using 1000 shares, I'd get $2 when I bought, and another $2 when I sold (total of $4). Thus I would be given a CREDIT of $4.

    Best way for getting short: Let's say I want to short and teh bid is $1.00 and the ask is $1.01. I'd use ARCA and place a short sell order at $1.01 and I wait and hope I get filled. I'm adding liquidity because I'm making more shares available at $1.01. Now let's say I got filled, prices move down and the current bid is $0.95 and the ask is $0.96. I would get out of my short using ARCA by placing a buy order at $0.95 and I wait to get filled. I'm adding liquidity because I'm making more shares available at $0.95. If I were using 1000 shares, I'd get the same $4.

    Hope that answers your question!

    By Blogger J.C., at October 14, 2006 9:30 p.m.  

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