Arbitrage trading involves the simultaneous purchase and sale of stock to make profits from the difference in the stock price. In this type of transaction, profit is made from the difference in price of similar financial instruments or the same stock in different market or different forms. This difference arises due to the inefficiency in the market and there is a mechanism to ensure that the price difference does not stay for a long time. However, due to the recent advances in technology, the difference is not significant and does not stay for a long time. It is a matter of seconds before the prices are changed these days, all thanks to the technology and efficient pricing setups made use of by traders in modern days.
Trade details within the Dark pool/Black pool are hidden from the public in order to assist block trading by institutional investors. A synonym for private exchanges or forums for trading securities, it allows anonymity and a alternate way to avoid market de-stability and adverse impact on the market trading pattern/stock prices. A major benefit dark pools trading is price improvement. For example, a stock's bid price on the official exchange stands at $7.00 and the first asking price stands at $7.10. The dark pool price will be set at $7.05, the midpoint between the bid and the ask. Dark pools are similar to broker dealers and are regulated as per its registration with the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Regular audits and examinations, trade prices within the National Best Bid and Offer (NBBO) are important characteristics of a Dark Pool.
Day traders are investors who try to make money rapidly within a day and ends up closing all traders before the closing of the market and will not be holding any positions open overnight. This is used by traders who cash in on the small movements in stock prices and magnify their returns. It is often thought of as an easy way to make money. However, it does not happen every time and day traders end up making losses in their initial trading days. It takes certain level of experience before they make profits. They end up losing money due to the bid-ask spread, fees involved to obtain real time stock prices and the trading fees involved, including the stock analysis packages. Due to this, stock traders need to earn significantly to overcome the added costs.
Stock Dividend In events where companies fall short of money, they distribute stocks so that they can generate liquid cash from shareholders. They can be considered as the fraction of money paid to an existing share. For example, a company may issue a stock dividend of 0.1 shares for every share possessed by the shareholder.
ECN (Electronic Communication Network) – is an electronic system for trading different exchange commodities. ECN became wide spread on US stock markets (NYSE, NASDAQ and AMEX exchanges). In fact, ECN is a completely electronic analogue of exchange. Traders, retail brokers, market makers and big investment funds can send their orders to ECN. All the orders are absolutely anonymous, and this is one of the reasons why major players prefer to place their orders on ECN. The most popular electronic communication networks in US stock markets are: Arca Direct Edge (EDGX+EDGA) BATS exchange (BATS+BATY) NSDQBX In most cases ECN can be called a secondary market, meaning that the stocks having IPO on one of the three largest exchanges can be presented on all ECN’s at once. Connection between different ECN’s ensures routing algorithms that are unique for every particular ECN. In accordance with the NBBO rule, ECN guarantees to execute orders at the best price even when there is no local liquidity. ECN earns from the spread of commission for adding and removing liquidity. At the moment there is a fierce competition among ECN’s, causing lowering order execution fee, development of more effective routing algorithms and order types. As a rule, ECN pays for execution of a limit order, which was listed in order book for at least 2 seconds. This makes ECN attractive for non-aggressive sellers and buyers who want to get rebate; on the other hand, high liquidity attracts major players like large traders, hedge funds, and mutual funds.
Level II (DOM, Market Depth) is a book of orders to buy/sell stocks in NASDAQ system. When traders place orders, they enter the market through a variety of market makers and other market participants. Level II is a queue of orders sorted by best BID and ASK prices (market depth) with market makers and ECN unveiled. Level II provides info on types of traders who are buying or selling stocks on US market. That is why Level II is thought to be giving clues about the price direction. There are 3 types of market participants in Level II: Market Makers (MM) – these are the players providing liquidity. They are obliged to buy when there are no other buyers and sell when there are no other sellers on the market. Electronic Communication Networks (ECN) is a computerized system of orders placement. Any market participants including big institutions can work through ECN. Wholesalers. Many retail brokers sell a load of client's orders to wholesalers, who execute these orders on exchange on behalf of retails brokers. Every market participant has a unique four-unit code, e.g. JPHQ – JPMorgan Market Maker codes: AGIS Aegis Securities, Inc. AXCS Access Securities, Inc. BARD Robert Baird & Co., Inc. BEST Bear, Stearns & Co., Inc. BRAD JC Bradford & Co., Inc. CANT Cantor Fitzgerald & Co., Inc. CHIP Blue Chip Trading, LLC. CIBC CIBC World Markets Corp. COST Coastal Securities, LTD. COWN SG Cowen Securities, Inc. CWCO Crowell, Weedon & Co., Inc. DBKS Deutsche Bank Securities, Inc. DEAN Dean Witter Reynolds, Inc. DKNY Dalton Kent Securities Group, Inc. DLJP Donaldson, Lufkin & Jenrette, Inc. FBCO Credit Suisse First Boston FCAP First Union Capital Markets Corp. FLTT Fleet Securities Corp. GFIN Granite Financial Group, Inc. GSCO Goldman, Sachs & Co. HMQT Hambrecht & Quist, LLC. HRZG Herzog, Heine, Geduld, Inc. ITGI ITG, Inc. JBOC JB Oxfrod & Company, Inc. JEFF Jeffries & Company, Inc. JOSE Josephthal Securities, Inc. JPMS JP Morgan Securities, Inc. KCMO Security Investment Company of KC LEGG Legg Mason Wood Walker, Inc. LEHM Lehman Brothers, Inc. MADF Bernard L. Madoff, Inc. MASH Mayer & Schweitzer, Inc. MDLD McDonald & Co. Securities, Inc. MLCO Merrill Lynch, Inc. MONT Bank of America Securities, LLC. MSCO Morgan Stanley & Co., Inc. NEED Needham & Co., Inc. NFSCV National Financial Services Corp. NITE Knight Securities, Inc. OLDE Olde Discount Corp. PERT Pershing Trading Co., LP. PIPR Piper Jaffray, Inc. PRUS Prudential Securities, Inc. PURE Pure Trading, Inc. PWJC Paine Webber, Inc. RAGN Ragen MacKenzie Inc. RAJA Raymond James & Assoc., Inc. RAMS Ramius Securities, LLC. RBCD RBC Dominion Securities, LLC. RSSF BancBoston Robertson Stephens, Inc. SBSH Salomon Smith Barney, Inc. SELZ ING Baring Furman Selz, LLC. SHWD Sherwood Securities Corp. SLKC Spear Leeds & Kellogg Capital Markets SNDS Sands Brothers, Inc. SNDV Soundview Technology Group, Inc. SWCO Schroder Werthheim & Company, Inc. SWST Southwest Securities, Inc TUCK Tucker Anthony, Inc. TWPT Thomas Weisel Partners, LLC. WARR Warburg Dillon Read, Inc. WEDB Wedbush Morgan Securities, Inc. WEED Weeden & Company, LP. WPCO Wasserstein Perella & Company, Inc. Codes assigned to Electronic Communication Networks (ECN's) and regional exchanges: ARCA Archipelago ECN EDGX – Direct Edge ECN EDGA – Direct Edge ECN BATS – BATS exchange BYX – BATY exchange NSDQ – NSDQ exchange NSDQBX – NSDQBX exchange PHLX – Philadelphia Stock Exchange NSX – National Stock Exchange AMEX – NYSEARCA Mkt Why do traders use Level II? It is thought that Level II provides additional info on what is going on with a stock. E.g. you can find out whether it’s bought by institutional or retail investors. It is also thought that you can define the end of a strong trend if you see the orders that are executed between BID and ASK, when big traders send market orders to make sure that their trade is open/closed. But Level II can misinform you as well. Moreover, all too often you will be misinformed intentionally; market makers can hide order size using hidden orders. It is done in order not to frighten other traders with a big size. E.g. if 500k shares are placed for sale at once, other traders will hardly try to break through this level. One more example: JPHQ wants to buy big size and places big order on ASK. This brings many short sellers who start to fill with orders on BID. JPHQ buys and makes stop orders of sellers executed; the price goes up. Market makers can hide their activity when trading through ECN. ECN can be used by anyone, so it’s hard to say who placed a big order you see.
Margin trading is the trading involved by borrowing money from a stock broker to purchase the required stocks. This can be considered as a loan from the broker which would allow you to purchase more stocks than the capital you have in your account.
See Level II.
Market Maker is a broker or dealer firm that plays a role of maintaining liquidity risk in the market through buying and selling of a particular stock on a regular and continuous basis at a publicly quoted price. Following the opposite side of current market trading pattern (i.e investors selling - market makers buying or vice versa) is the main characteristic of a market maker. When talking about market makers, Nasdaq and other over-the-counter markets are often mentioned. More than 500 member firms act as Nasdaq market makers quoting both bid and offer prices for an asset thus running the financial markets efficiently. The difference that the market maker earns between the buying and selling price of the security is termed as the bid-ask spread or the profit.
Momentum is the rate of change of price or volume of a particular stock. The main technique behind it is that if a stock price is moving upwards or downwards, it will continue to move in the same direction and this helps investors to identify trends of a particular stock. When the momentum sees acceleration in earnings or revenues, the trader will secure his long term or short term position with the belief that the stock will continue its momentum and move in the same direction. This might yield results in the short term prospect but however, it is not a good idea for novices.
Paper trading involves simulation for trading so that they can buy or sell securities where there is no real money involved during the transaction. This is done by keeping a track of the hypothetical trading positions and it makes use of a stock market simulator so that they get a close to real experience of actual trading so that they can get familiar and improve their trading skills. Due to this, investors and traders would get to know without having any capital involved. Due to this, they can also try and test their investment strategies without risking their money or capital. Many prop firms offer free demo account for paper trading.
Penny stocks are the stocks that are traded at lower prices and have a low market capitalization. They are generally not under the purview of market exchanges and are involved in high speculation and high risk, as they do not have enough liquidity or large bids. They are traded over the counter through pink sheets and OTCBB and have a small capitalization and the disclosures are limited.
Preferred stock is the sense of ownership a particular corporation has and it claims higher earnings than common stock on the assets. It also involves payout of dividends prior to the common stockholders on the shares they own. However, these shares do not have any voting rights. However, the structure of preferred stock varies from corporation to corporation. It is better to consider preferred stock as a financial instrument with the attributes of both debt (fixed dividends) and equity (potential appreciation) and they are also known as preferred shares.
Primary market is an exchange where a company conducts an IPO, and where its stocks can be purchased by investors.
Proprietary Trading is the form of trading in which an institution or firm gets involved in direct trade rather than making profits from commission. They decide on making profits from the market movements rather than making commission from the trade proceedings and process of trades. In the recent days, this term has brought a different meaning. Firms provide the traders with capital or leverage and later, earn as a result of the payout or commission earned from the trades.
Order routing is a process of forwarding orders to ECN, Dark Pools and exchanges. It ensures compliance with the NBBO rule and execution of big orders in Dark Pool. Every ECN has a set of unique routing algorithms serving particular goals. On professional trading platforms like Sterling Trader Pro trader can choose routing algorithm (order venue) for his order in advance. When there is no liquidity on a chosen ECN, order is routed out to other market centers to find it. Order routing works for displayed orders, hidden orders, and iceberg orders. List of Order Venues on Sterling Trader Pro Terminology: Market Center: Any available ECN, Exchange or Gateway shown on Level II. Routed out: an order is redirected to another market center due to unavailability of liquidity on Primary market. Re-Route: an order is redirected specialist to another market center by specialist due to unavailability of liquidity on specialist book. Proactive: once order is displayed by primary/secondary exchange, it may be routed out if a non-proactive order on another exchange interacts with the order (aggressive post). Non-Proactive: once order is displayed by primary/secondary exchange, it will not route out if a non-proactive order on another exchange interacts with the order (non-aggressive post). Post: Orders displayed on Primary or Secondary market center, which they were sent to. ELP: Enhanced Liquidity Provider stands for any execution network, which transacts outside of the primary exchange “in the dark”.
Stock Trading Software
A computer program facilitating trading of stocks & currencies is what defines a "stock trading software". Different brokerage firms offer different types of trading software not only for trading but also to manage client accounts. Besides, third party purchased software is generally for an enhanced trading experience. Majority of trading software do not allow to buy and sell shares unless you have a brokerage account. Trading software only helps to improve stock picking decisions through fundamental and advanced technical analysis. Stock trading software is a part of the growing and rapidly fast usage of electronic communication networks or ECNs in our day to day lives. Also, benefits like minimal transaction costs have enabled many brokers to provide the clients with stock trading software free or lesser costs.
A trading style in which the gains are captured in a particular stock between one to four days from purchase. Traders make use of technical analyses before they select a stock, which has a good momentum in short term. They do not bother about the long-term values involved in the stock and focus mainly only on the current trends of the stock. It involves the traders to act at a very quick pace to see the stock trends and invest in a very short time frame. Hence, this is suitable for home traders and day traders. The large scale institutions invest in bulk and this helps the stocks to move at a quick pace. Due to this, individual and small investors are able to make profits without having to invest large sums of money.
Time and Sales
Time and Sales is one of the windows of a trading platform, which shows info on all the orders for particular stock (sometimes it shows bid and ask quotes changes as well). Such info contains order size and place of execution (ECN). Time and Sales window in Sterling Trader Pro platform The so-called Tape Reading, made from some patterns of Times and Sales, is an irreplaceable part of some trading strategies like scalping, rebate trading, stocks in play trading, breakout trading. Usually T&S analysis is used along with the Level II for searching big buyers and sellers. What to look at when using Times and Sales? -Orders size Print sizes will show whether your price movement predictions were right or wrong. Before your trade is open in T&S you should see lots of orders with size over 300 shares to buy/sell (if you want to buy/sell accordingly). This is a visual guide rather than a strict rule. There are many visually correct set ups that are traded without any size. You better avoid such cases, as you cannot be sure if your predictions are correct and probability of making profit is therefore reduced. -Time and Sales speed This is another clue given by T&S. As a rule, when stock price breaks above or below a level of resistance/support, orders size and T&S speed will be growing, which means the stock has generated so much interest within this price range. -The price at which orders are executed When buying a stock, we want many orders to be executed at ASK price; and vice versa, when shorting a stock, we want many orders to be executed at BID price. So we can see how desperately traders want to open or close this stock position.
While stock trading software does not allow traders to place trades or close transactions, a trading platform is a computer program or software which investors use for opening and closing trades and controlling market positions. Similar to a stock trading software, these platforms are also offered for lower costs or for no cost on a condition to have a funded account with a broker and/or conduct specified number of trades per month. In order to track the broader markets and stock performances, the trading platforms include market analysis software also. This enables them to incorporate various trading strategies through the up to date news maintained by the software based on the filtered stocks of the user.
Trading strategy involves a set of rules and objectives that determine the conditions when entries and exits are made in stocks. It comprises of specifications that decide the trade entry points, trade filters and triggers and the set of rules that determine the trade exit point, management of investments, time span and the type of orders to be placed. Usually, trading strategies are based on the previous data of stocks and based on this, analysis about the future trends and performance of a particular stock are made to determine the trading strategy. It can be considered as a mathematical formulation and rules, which determine the stock entry and exit points that help a trader or investor to determine if investing in a particular stock is profitable or not.
In this trading style, profits are made by analyzing the movement of a particular stock. When a stock starts moving upwards and follows the same trend, an investor buys the stock and makes profit. Similarly, when there is a downfall in the price continuously, the investor assumes that the stock will continue falling further and thus invest in the stock by short selling. It is by speculating that the prevailing trend of the stock price will continue. An investor or trader can make money from their position until the trend of the stock reverses, and a reversal in the stock momentum might occur at different times based on the stock.