Day Trading

A LIT market, or light pool market, refers to ECN stock exchanges where the order book is made public for all who subscribe.  A LIT or light pool market will allow traders to see the amount of liquidity that is posted on the bid and offer of the order book for a security.  A trader will use the information that they see on the LIT markets as an indication of the stocks likely near term direction.

On the other hand, you can take a look at what dark pools are.

A majority of volume still transacts over the light pool markets.  According to a recent Wall Street Journal Article, about 70% of volume is transacted in the LIT markets.

It is easy to spot a large buyer or seller when they post orders to LIT markets, because the large order will show up on the book for all to see.  Because traders will run the price away from the large order, large buyers and sellers have become very clever about transacting on the light pools but they still are usually forced to show themselves to a large degree.

Examples of LIT ECNs are:

• BATS,
• BATS BYX
• ARCA
• EDGX
• EDGA
• NASDAQ
• NASDAQ Boston.

Each light pool has a different pricing scheme, and some will pay rebates for adding liquidity while others will pay rebates for removing liquidity.  A trader must understand pricing intricacies of each market in order to maximize his own cost efficiency, as well as to understand which markets will be the most liquid.

A trader with a longer term holding strategy who only places limit orders for profit will most likely always sit on the market that pays him the biggest rebate, and in some cases a trader can even make money from his transactions alone.  On the other hand if the trader seeks the most aggressive liquidity he will increase his trading costs, but will improve his ability to get executed at the price he wants.

Eventually when you have been trading for a consistent period of time choosing the right LIT ECN for your needs becomes second nature.

Dark Pools: The Rise of Private Exchanges

While lit pools dominate the trading landscape an increasing number of traders are turning to dark pools for their transactions.

Dark pools which are private exchanges with no transparency have been gaining popularity in recent years.

In fact they accounted for about 40% of all stock trades in 2017.

Institutional investors in particular are drawn to dark pools because they offer the ability to find buyers and sellers for large orders without revealing their intentions.

This allows them to obtain better pricing and minimize market impact.

Dark pools also offer lower transaction costs and the potential to fill trades closer to the mid-point of the bid-ask spread.

However critics argue that dark pools may result in stock prices on public exchanges not reflecting the actual market value.

Despite the controversy surrounding them dark pools continue to play a significant role in the trading world.

At InsiderFinance we provide real-time options flow sentiment analysis and trends analysis to help traders interpret both dark pool and lit pool trades bridging the information gap between retail traders and institutional investors.

Don’t forget to check out our Masterclass for trading with options flow and dark pool prints.

The consolidated tape, also referred to just as the “tape” of a stock, is a list of every transaction over 100 shares that takes place in that stock. The tape displays the time of the transaction, the exchange or ECN the transaction took place over, or if it was in the dark markets, the exact price, and the size of the transaction.

Traders use the consolidated tape to help spot large buyers or sellers, and predict future price movement. Traders do this by watching for large surges of buying or selling showing up on the tape, and by watching for abnormally large transactions (usually transactions over 10,000 shares in size). A trader who successfully spots large buyers or sellers can take a position in the same direction as the large market mover, and piggyback on the momentum created. Finding trade entries and exits based on tape prints is known as “reading the tape”.

A tape may also show that when a stock reaches a certain price, a large trader steps in and either buys or sells at that price. Sometimes, when a large institutional investor only steps in at a particular price, the pattern may repeat several times. A trader can use this information knowing that the price the large trader steps in on is an area of support or resistance, and may provide an entry or exit for a trade.

A tape is also used to understand which markets are most active for a stock, and this will give a trader a better chance of being executed at the price he wants. For instance in a stock with a thick book, a trader may notice that BATS BYX exchange is printing very rapidly on the offer, but other ECNs are not. A trader may be able to get filled very quickly on BATS BYX, and may not get filled at all on other ECNs.

Having access to the full consolidated tape, and having direct market access from a brokerage so a trader can be executed at the best possible price is crucial to being profitable. At How We Trade, we would never trade without watching the tape, and we believe all traders should enjoy the same advantages we have. To be a trader with access to the tools used by professionals, enter your information in our sign up sheet and open an account with us today.

A dark pool is a stock exchange that is not open to the public, and does not display the liquidity posted to its books to anyone.  Dark liquidity is considered any liquidity that executes away from public exchanges.  The purpose of trading in dark pools is mostly to minimize a large order’s impact on price.  Orders transacting between institutions away from public markets are considered dark liquidity as well, even if they never enter into any established “pool”.   While liquidity is not displayed, after an order transacts it prints to the public consolidated tape, and everyone can see that the order transpired.  What is not known is which dark pool exchange the order transacted in.

In a public exchange, all of the orders in the book for a stock on the bid and offer are displayed to the public.  While this is good for efficient price discovery, it is bad for institutions with large orders to be executed.  If an institution with a large order were to put their entire order on the public light pool ECNs, traders would purposely move the price away from the order in an unfavorable direction to the institution (if it is a buy order traders will move the price higher and force the institution to execute at a worse price.)  When the NYSE was the exchange executing almost all of the volume, this was a big problem for traders with large orders.  Other traders would know the big order existed and would force the price in an unfavorable direction. The market impact of large orders was even greater than the order size alone seemed to indicate.  As more volume is transacted on dark pools, it has called into question their role, as having a lot of hidden volume is not conducive to efficient markets.

When an order is entered into a dark pool and there is no contra liquidity to be matched with, it will post on the dark pools books just as if it were a light pool, except the books are hidden from everyone except the pool owners.  When another order enters into the pool it is crossed with the sitting contra-direction liquidity and is executed.  The order executing in the opposite direction of the large order will be completely filled just as if it was executed in the light pools, but unlike the light pools the trader behind the smaller order will not know the true extent of liquidity in the pool, only that it is greater than his order.

This is known as the “winners curse”.  This is because it can be assumed that if the order was filled completely, there is a good chance that it would have been more beneficial to let the larger order impact the market first because the larger order will have a bigger price impact than the smaller order.  In reality it is usually a mixed blessing because there are a lot of players transacting in most securities and new liquidity is always entering into the pools.  It should be known that there are regulations preventing most orders from executing away from the national best bid and offer, so a dark pool cannot prey on unsophisticated traders.  However, most traders acting in the dark pools are very sophisticated.

There are also different types of dark pools, and depending on the pool type it may change the participant’s idea of the quality of a fill.  For instance, some pools will only match client orders against other client’s orders.  Having an order completely executed in a pool of this nature is more likely to be viewed in the “winners curse” context.

Other dark pools are owned by broker deals, and the broker dealer will act as a counter party to the order if there is not enough other contra client liquidity to match the full order size.  A fully filled order with a broker dealer counter-party is often a high quality fill, because the broker executed the order from their own share balance simply to provide high quality execution.

This type of dark pool relationship is very important to How We Trade, and we utilize this execution very frequently to get more liquidity at better prices than would be available otherwise.  Our broker dealer dark counter-parties are one of the biggest edges we can offer a trader, and because we transact so much volume with these broker dealers our execution costs are comparably very low.

There are times where certain price levels will have vastly more liquidity available in the dark pools than on the public exchanges, and vice versa.  Volume has generally trended toward more execution in dark pools over the last few years, meaning a higher percentage of total volume executes in dark pools now than in previous years.  This means that traders need to educate themselves and trade with firms providing next generation execution like How We Trade, or risk being left with inferior tools.

Types of Dark Pools and Their Impact on Execution Quality

Dark pools come in different types and the type of dark pool can impact the quality of the trade execution.

Some dark pools only match client orders against other clients’ orders.

In these pools having an order completely executed is more likely to be viewed in the context of the “winners curse.” Other dark pools are owned by broker-dealers and if there isn’t enough client liquidity to match the full order size the broker-dealer may act as the counterparty to the order.

A fully filled order with a counterparty broker-dealer is often considered a high-quality fill because the broker executed the order from its own share balance to provide efficient execution.

How We Trade frequently utilizes this type of execution to access more liquidity at better prices.

This relationship with broker-dealer dark pools gives us a significant edge and helps keep our execution costs low.

Traders need to be aware of the different types of dark pools and work with firms that offer next-generation execution to ensure they have access to the best tools for their trades.

A professional day trader is anyone who day trades, and creates enough profits to provide for their lifestyle on a consistent basis.  There are multiple ways to do this, but the majority of professional day traders work for a company that allows them to trade firm capital, and then take a percentage of the profits as their own.

In the past this was done at large banking institutions but, the Volker rule passed in 2010 largely separated the proprietary trading desks from the banks.  In response, some of these desks were spun off into separate hedge funds and proprietary trading firms.  Today, most professional trading is done at hedge funds and proprietary trading firms, and a person need not always have past professional trading experience to land a job.  Many proprietary trading firms will allow a trader to open an account, give the trader an initial buying power, and either let them grow in the firm’s trading system, or let the trader use their own methods.

At Howwetrade, our trading group trades with a proprietary brokerage firm.  That means that we offer traders the ability to open a proprietary brokerage account and trade firm capital.  The benefit of this to traders is that they get an account with one of the largest proprietary brokerages in the industry, with all the professional resources and benefits they offer.  Traders are then allowed to keep the majority of the profits they generate, using firm capital!

We have a professional trading group with mentors that will work with traders if the person desires, and all traders have access to our chat room and squawk so everyone is keeping up with the action we are seeing in the market.  Many people in our group have years of experience, and traders usually find the chats very helpful.

We love to help people with a passion for trading expand their skill set, and hopefully help them achieve greater profits through lower transaction fees, and greater buying power than they are being offered at their current brokerage.

If you are a professional trader already, or if you have a passion for trading and are looking for a way to boost your trading career to the next level, contact us and let us know a little about your trading style and if you are interested in joining our group.

The order book of a stock is a list of buy and sell orders organized by price level and ECN.  It shows every share being bid to purchase and offered to sell for that stock.  It looks like this:

The purpose of the order book is so traders can see the buy and sell interest in the stock, and which prices have the greatest volume of shares.  This helps traders to understand which direction, and how far the stock is likely to move in the future.

The order book is very useful for identifying significant price levels.  For instance, if there is a large quantity of buy orders on a given price level, this level is likely to be a level of support.  This becomes a price that a trader may be interested in purchasing a stock, looking for the price to bounce up off of the area of support. The trader may also be interested in shorting this price if it looks like all of the shares on the bid will be executed or cancelled.  When a significant level gets executed like this, it is often a spot where there will be momentum in the direction of the executed price level after the level is gone.

The order book only shows shares that are being bid or offered on light pools.  The order book for dark pools can only be seen by the managers of the dark pool.  The reason behind this is obvious; large buy or sell orders can hide in dark pools and traders will not know they exist.  This minimizes the influence of these large orders on price movement.  If the large order were visible, traders would run the price away from the order and try to force the large order to be executed at a worse price.  Dark pools have become controversial lately because there is some question about whether they serve to make the markets more efficient, or less fair.

The light pool ECNs that are most commonly seen on the order book are BATS, ARCA, EDGA, EDGX, NASDAQ, BATS BYX, and NASDAQ Boston.  Other ECNs such as CBSX, NASDAQ Philadelphia, Bloomberg, AMEX, and a few less common light pools may be seen at times as well.  For a trader to access the order book information feeds, he must pay to subscribe to each individual ECN.  Some brokerages will offer traders discounts because they have good relationships with the networks and can pass savings along to the trader.

Professional traders watch order books all day. Many traders who trade retail accounts have never seen an order book, and they are trading without a very valuable piece of information.  We always recommend that day traders have access to order books so they can see where buyers and sellers are posting the most volume.  At How We Trade, we only trade while watching the order book.  We recommend that you do so as well.

The Importance of the Order Book in Trading

The order book is an essential tool for traders to gain insights into market sentiment and identify potential trading opportunities.

By observing the buy and sell interest in a stock as well as the prices with the highest volume of shares traders can gauge the direction and potential movement of the stock.

Recognizing significant price levels in the order book such as levels of support or resistance can inform traders’ decisions on when to enter or exit positions.

However it’s important to note that the order book only reflects shares being bid or offered on light pools while dark pools remain hidden to maintain price fairness.

Traders who have access to order book information feeds can benefit greatly from understanding market dynamics and it is recommended that day traders utilize this valuable resource to enhance their trading strategies.

The bid of a stock is highest price at which a buyer has entered an order to purchase shares.  The bid shows up on the order book, which shows all shares being bid to purchase and offered to sell for a particular stock.  The bid changes throughout the day, as buyers are willing to purchase shares at different price levels based on demand and expectations for future value.

When a trader enters a buy order on a stock, he is said to be “bidding” a particular price level.  A buy order which gets posted to the books is considered a bid, so while normally a stock’s bid refers to the highest price buyers are willing to purchase shares; technically all buy orders are considered bids.  The highest priced bid is considered the “national best bid”.  It is illegal in most instances for a broker to execute a client’s buy order at a higher price than the national best offer, or to execute a sell order below the national best bid.  A market order that removes all posted liquidity on a particular price level will, however, push the national best bid or offer in the direction of the order, and there is no guarantee that the whole order will be executed at any particular price.

Only limit buy orders can post to stock’s books as a bid, since market orders to buy will only remove liquidity being offered.  An aggressive buy order that only removes liquidity is not considered a bid.

Most brokers will only display the national best bid and offer for stocks, but a professional trader can view the entire order book and see buyers sitting on all price levels.  This lets the trader get more information about the buying interest in the stock at various price levels, and presumably this will lead to a better understanding of the direction a stock will move in the short term.  It is important for a trader to have access to view every bid entered to a stock’s books on all ECN light pool markets.

Dark pools of course do not display their order books, but there are ways for traders to test available liquidity in the dark pools to see if these sophisticated buyers are bidding at higher or lower prices than the displayed liquidity on the light pools.  If dark pool buyers are bidding at a higher price than is displayed on the light pools, it is a good indication that a large buyer may move a stock’s price up in the near future.  If there is no dark pool liquidity being bid at the same price level of the national best bid, it is a good indication that there are no large or sophisticated buyers supporting the current price, and the price may drop in the near future.  This is dependent on the liquidity and volume typically transacted in a stock because in some low liquidity instances there may not be significant meaning to dark pool activity.

Dark pool bid discovery and a full order book of light pool bids are important information sources used by professional traders which can give them a huge advantage over retail traders without access to view and test these.  We recommend that traders always use professional software platforms with access to dark pools for this reason.

Understanding the Bid-Ask Spread and Liquidity

The bid-ask spread plays a crucial role in determining the liquidity of a stock.

It refers to the difference between the highest potential price a buyer is willing to pay (the bid) and the lowest potential price a seller is willing to accept (the ask) for a security.

A narrow bid-ask spread indicates ample liquidity making it easier to enter or exit positions.

On the other hand thinly traded securities such as penny stocks often have larger bid-ask spreads due to lower liquidity and imbalanced supply and demand.

Market makers including financial institutions benefit from the bid-ask spread as it represents their profit.

They buy at the bid price and sell at the ask price taking advantage of the difference.

Retail traders however may not pay much attention to the bid-ask spread for mainstream stocks but it can be a significant source of profitability for market makers.

It is important for traders and investors to understand the bid-ask spread and consider it when making investment decisions.

Access to information about dark pool bid discovery and a full order book of light pool bids can provide professional traders with a significant advantage over retail traders which is why it is recommended to use professional software platforms with access to dark pools.

This is an overview of the most popular day trading strategies.  There are many specific variations of these strategies, that a trader may develop, the key is to find one that works for you, hone and refine it as far as you can, and stick to your discipline religiously.  These are a few of the most popular strategies in broad terms.  Of course to make money consistently a trader will have to to develop a more specific set of rules.

Scalping Strategy

A scalping strategy is a very short term strategy designed to capture very small price movements with a high degree of accuracy many times, or with large size.  A scalping strategy looks for an entry at the beginning of momentum, where the scalper will quickly be in the money.  A scalper typically will not hold a position out of the money for long, because one large loss will offset many successful trades.  Typical spots for a scalper to look for momentum are when a stock is breaking an intra-day high or low, the breaking of significant price levels such as an area of support or resistance, or when a large buyer or seller is spotted on the tape.  A scalping strategy may look for gains as small as a penny, or even a fraction of a penny, and a position will not typically be held for more than a few minutes.  Scalping is good for its high winning percentage, but for a scalper to be successful he will need to be very mindful of fees and commissions.  Using limit orders and a brokerage that uses direct market access with pass through ECN rebates are good ways to control costs.

Also using binary options to increase return can be very effective for successful scalpers.  Binary options pay out very high returns for winning trades, but expire without value for losing trades.  If a scalper can take winning trades on a relatively consistent basis, he may make a much higher return using binary options as a trading instrument.

Momentum Strategy

A momentum strategy is normally held slightly longer than a scalping strategy.  Momentum positions may be held from a few minutes to a few hours typically.  Momentum traders will look for news or heavy volume to create a strong directional move.   A momentum trader will stay in the trade until the price action is no longer moving in his or her favor.  Momentum trading requires traders to be very timely with their trade entries since the price is likely moving very quickly, but profits can be exceptional in a very short period of time when done correctly.  This type of strategy really requires traders to subscribe to news services and monitor volume and price alerts constantly to be profitable.  This strategy was more popular before 2007.  Today HFT traders have power computer algorithms plugged into news services ready to strike, and they will always beat day traders to the very first liquidity.  A trader can still be profitable with a momentum strategy but it has become much harder to get the best entries as automated volume has become a bigger percentage of total market volume.  To be most profitable a trader must trade with the best tools available and always maintain strong discipline with early entries.

Fade Strategy

A fade strategy involves taking a position after a large momentum move.  The theory behind this is that during a rapid high-volume price swing, momentum usually will move the price too far, and there will be some correction back towards the pre-move price.  The reasoning behind this is some early entrants to the trade are ready to take profits, and the regressive movement will scare others out of their positions, adding pressure back towards the original price.  People who trade a fade strategy look to exit when the price moves back in the direction of the original momentum.  Taking fade positions is very lucrative when done correctly, but it is not easy for beginners.  It can take a lot of experience to correctly identify the entry and exit points as they are not always clearly defined. There is also a large risk in taking a position in the opposite direction of strong momentum, so a trader must keep losses as small as possible and not hold positions out of the money when using this strategy.

Technical Trading

There are a number of technical indicators that a trader may use to define entry and exits.  A technical trader can look at bar charting time periods from between one minute and one month, so positions can be held very short to years.  Some indicators used include Fibonacci ratios, stochastic indicators, volume weighted moving average (VWAP), relative strength indicators, and many others.  If a trader notices a pattern of a stock’s price action being defined by a technical indicator, he  may decide that it will be profitable to trade with.  The problem with this method is that these public indicators have been around for a while in most cases, and very well known by market participants.  If making money trading technically was as easy as following public technical indicators that everyone is aware of, everyone would do it and be rich.  Usually these are not profitable over time. There are still some traders using technical indicators in conjunction with their own filters, but it will take a lot of losses and a lot of experimenting for a trader to become profitable, if ever. The danger in using these strategies is that they may be profitable for a short period of time, but over time the trader would likely end up paying more in commissions than is being made in profits.

In the end no matter what strategy a trader uses, it will take work to perfect.  It is best to test a strategy with a practice account before using real money, and then slowly integrate larger size with a live account.

Day trading is not a traditional corporate job.  There is no corporate hierarchy for traders to work their way up except for their account value and profitability.  Trading does not require a college degree, it is open to anyone who has capital to trade with in the stock market.  Trading is very egalitarian. No one cares if the person inputting an order has a college degree, what gender they are, or what race religion or creed.  The only factor influencing success is a traders own ability to perform.

Start With Binary Options Trading

Traditional binary options trading requires a higher investment. Luckily there is binary options trading, where you have to predict whether the price of an asset (ex. Apple stock) will go up or down after a certain time. You can start with as low as $200 and you don’t need to be an experienced trader, because the robot is very newbie friendly.

If you are new to binary options trading, we recommend you use a binary options robot. This robot will do the trading for you on auto pilot. You can get your free copy here:

Generally when a professional trading firm is looking to hire a trader they will look for a college degree or past experience trading professionally.  Usually the lack of a college degree is not a definite sticking point for prospective traders, but it can be difficult to be considered without at least having prior trading experience. 

Everything a trader needs to know can be learned on the job, but experience with a professional software platform, habits like using hot keys and choosing between ECN markets and dark pool markets, and understanding of the data feeds that a professional looks at bypasses a big part of the learning curve.

To be a day trader of course a trader does not need to work with a professional trading firm such as a hedge fund or a proprietary trading firm.  Anyone with the capital to open a day trading account ($25,000 with a retail brokerage) is capable of setting out on their own and developing a trading strategy.  Of course this can be extremely time consuming, be met with a lot of failure and loss of capital, and there is no guarantee that a trader will ever become profitable.

A trader can fund a day trading account with significant less money than $25,000 if they open a proprietary brokerage account, but the trader must obtain a Series 56 if he is based in the United States.  The benefit is that the trader can fund an account with less capital and can often times be helped with their trading strategy by the firm.  No college degree is required by law to open a proprietary trading account.

Prospective traders should consider that the open nature of stock trading is a double edged sword for them.  While the markets are open to everyone, some market participants are significantly more experienced and sophisticated than others.  To trade without any training, experience, or strategy is like a baby gazelle trying to survive by itself in a savannah full of lions.

This is especially true now that high frequency trading firms have computer algorithms constantly scanning thousands of stock symbols looking for traders entering what they consider to be stupid trades.  High frequency trading firms can act at lightning speed and have the best technology money can buy to give themselves every advantage possible.  These high frequency firms can move a stock, or even the entire market, very quickly and traders can very quickly lose a lot of money if they do not have the proper risk control measures in place.

There can also be a big technological advantage for some hand traders over others.  In the same way that some traders are trading with years of experience and others are brand new, some traders have access to various dark pools, direct market access to ECNs, and much lower transaction costs. New traders tend to just join a retail broker and pay full retail fees for inferior software, data, and execution.

While a college degree is not required to trade, a trader still needs training, experience and mentorship to be successful.  If they don’t have access to proper training, they more than likely will end up with a very expensive lesson from the markets on the importance of proper training.  More than likely a trader without any guidance will end up frustrated, confused, and barely more knowledgeable about trading than they were to begin with.

At How We Trade, we recommend that new traders do anything they can to educate themselves and get the proper training from a professional firm.   When we bring new traders on we provide full training on every aspect of day trading from software, to strategy, to market behavior.   We provide professional software and data feeds, as well as risk controls to protect our traders.  This is the type of experience you should look for if you are trying to make day trading your full time profession.

New traders do not need college degrees, but like any other profession, without the right training they have no chance of survival.  With the right training and motivation, a trader can achieve the success he is seeking.

Is a College Degree Necessary for Day Trading?

The question of whether a college degree is necessary for day trading is a subject of debate among traders.

Some argue that formal education is not required as trading skills can be learned through experience and self-study.

They believe that everything a trader needs to know can be learned on the job and prior trading experience is more important than a college degree.

On the other hand others believe that a college degree in finance or economics can provide a strong foundation for day trading.

They argue that a degree can offer valuable knowledge in understanding market trends and fundamental analysis.

Additionally a college degree can provide access to internships and networking opportunities that can be beneficial for traders.

However successful day traders can be found both with and without a college degree.

Ultimately the decision to pursue a college degree as a day trader depends on individual circumstances and preferences.

In the end experience and understanding of the market trends are often more important factors for success in day trading.

ECN is the abbreviation for electronic communication network.  An ECN is basically a computerized stock exchange that offers stock traders an alternative to traditional exchanges like the New York Stock Exchange.  ECNs were created in 1969 by INSTINET and proliferated greatly during the 80s and 90s, but recently volume has shifted very heavily away from traditional stock exchanges to electronic communication networks.

The electronic communication networks as a whole are known as the LIT or Light pool markets.  These are the markets that are available for all of the public to see.  This is where about half of all volume transacts in the stock market, and they are open for access to any subscribers with a computer and internet access.  Unfortunately few brokerages except for proprietary trading brokerages offer day trading accounts access to these networks.  The opposite of LIT markets are dark pool markets.  ECNs do not function primarily as dark pools, but some are now offering subscribers access to deeper pools of liquidity by offering some of their own dark pools.

The benefits of transacting over an ECN vs. a traditional exchange market are evident for a stock trader.  An ECN seeks to remove the middleman by allowing a transaction to occur directly between market participants.  ECNs have been credited with the massive reduction in trading transaction costs over time.  Electronic exchanges removed the need for a trader to be on an exchange floor, so besides saving transaction costs, they also opened up market access to millions of traders who now only need a computer and an internet connection to participate in trading.

If a trader subscribes to an ECN, not only is she allowed to transact over the network, but she is also able to see the shares available to buy and sell on the ECN’s order books.  This allows a trader to get an idea of buy interest vs. sell interest in a stock and can give a trader a read on the likely near term price movement.  If the trader subscribes to the full suite of popular ECNs, they can choose to transact over the one that best suits their liquidity needs, balance fill potential with cost to transact. This gives the trader the highest probability of having the order transacted at the most beneficial price and cost to the trader.

The Most Active ECNs include:

NASDAQ: Including NASDAQ Boston exchange, and NASDAQ Philidelphia exchange

BATS BZX and BYX exchanges

Direct Edge EDGX and EDGA exchanges

NYSE ARCA

CBSX

Each ECN determines its own fee structure for transactions.  It is common practice to pay a rebate to traders for either adding liquidity to its books or for removing it, and to charge a fee for the opposite order type.  Depending on the pricing structure of a particular ECN, rebates offered can be as high as about $.003 per share, and costs can be as high as $.003 per share, but cost cannot be any higher than this by law.  Some ECNs also offer incentives to transact higher volume over the network by paying higher rebates or reduced costs to those meeting certain volume thresholds for either adding or removing liquidity.

Because ECNs provide not only an inexpensive transaction medium for traders, but also rebates for certain order types, it is very advantageous for a trader to use a broker that will offer direct market access with pass through fees and rebates.

This is good for traders for a few reasons.  For one it means that traders are charged on their volume transacted and not one flat fee.  If a trader has a small order, they will pay a correspondingly small charge.  Most traders are not trading anywhere near trade sizes that would approach the fees they pay with a retail broker.  For a traditional retail broker to save a trader money over pass through ECN charges each trade placed would have to be many thousands of shares and a trader has no access to rebates.  Under a typical fee structure a brokerage can collect fees from the trader for placing the trade, and then turn around and collect fees from the ECNs for transacting with them.

Awareness amongst traders at this time that this type of pricing is available to them is generally very low and most traders stick with the big name retail brokerages out of familiarity and the lack of licensing needed to have accounts with them.

At How We Trade, we use a broker that will completely pass through all rebates and costs for trading over ECNs.

How ECNs Benefit Traders and Offer Cost-Effective Trading

Electronic communication networks (ECNs) have revolutionized the stock market by providing an alternative to traditional exchanges.

ECNs eliminate the need for intermediaries allowing transactions to occur directly between market participants.

This not only reduces transaction costs but also opens up market access to millions of traders who only need a computer and internet connection.

By subscribing to an ECN traders not only gain access to the network but can also view the available shares to buy and sell on the ECN’s order books.

This enables traders to gauge buy and sell interest in a stock and make informed decisions about near-term price movements.

Additionally ECNs have their own fee structures offering rebates for adding or removing liquidity.

These cost-effective transaction mediums benefit traders as they are charged based on their volume transacted resulting in lower fees for smaller orders.

It is advisable for traders to use brokers that provide direct market access with pass-through fees and rebates to take advantage of these cost-effective trading opportunities.

A scalping strategy employs a very short holding period for positions.  All day trading takes place over relatively short time frames compared to others in the investment world (generally less than a day) but scalping is the strategy with the shortest holding period.

Scalping involves taking very small profits many times a day, or by catching a very small price movement with very large quantities of shares.  The holding period for a scalper may be as little as a second, and is not generally more than a few minutes.  A scalping strategy may involve simply trying to catch as small as a 1 penny change in a stock’s price, and can be as simple as getting orders executed on both the bid and offer of a stock without the stock’s price even moving.  This is known as “taking the spread”.  Scalpers use anywhere from 100 shares (1 round lot) to tens of thousands or possibly even more shares, depending on the available liquidity in a given stock or security.  If a stock is very liquid (there are many buyers and sellers offering a large amount of shares) it generally supports larger positions because a large position in a less liquid security would risk a large price impact to exit the security.

A common scalping strategy today is employed by high frequency traders (also known as HFTs).  These HFTs are highly sophisticated computer algorithms designed to be the fastest to post and remove liquidity on a stock’s book, and because of their super high speed they are able to get beneficial order fills much faster than a human can operate.  These firms work so quickly that they can often respond to changing conditions faster can a human eye can even visually process the information.

Instead of fighting for fills on the equity markets with HFTs, for a scalper with a high winning percentage, trading binary options can be a much more profitable use of trading capital.  Binary options allow a trader to make much higher returns on winning trades than trading equities does, it just takes a slightly different approach to trade size.  Binary options are contracts whose value either expires with a pre determined return of about 150%-185% if they are in the money, or expires without value if they are not.  It is easy to see why using a successful scalping strategy with binary options is an effective way to leverage returns over traditional trading methods.

The HFTs use their extremely fast speeds to take thousands of small positions every day across hundreds of stock symbols, often times taking even fractions of a penny as profit.  The idea is that these small margins add up to big profit at the end of the day.  As competition has increased in this niche HFT firms are finding it harder to reap the huge profits they once did. Many institutional players such as mutual funds have adopted the same algorithmic execution strategies of HFTs as well so it has become harder for these HFT scalpers to find the opportunity they once had.  There are some indications that as volume increases HFT profits may return to previously high levels.

Humans can still employ scalping strategies as hand traders, but to be profitable it is often necessary to use more sophisticated tools than are typically offered by retail brokerages, such as mid-point execution and ultra high speed data feeds.  Humans must also pick their spots carefully as there is unlikely to be scalping opportunity present 100% of the day in a given security.  A human scalper can even use HFT firms to his advantage if he understands where the opportunity to use these firms is.  The best execution with these transactions often takes place in the dark pools.

Using dark pools a human scalper can even get better execution on the bid and offer than would be available with LIT markets and “take the spread” himself, and doing this a few times with large enough size can become very profitable.

Some scalping strategies may involve watching for areas of support and resistance and using these areas as entries, assuming they will continue to hold or to enter a position as the price breaks a support or resistance level and catching the very short momentum push (created in part by HFT firms) that may occur as the price  level breaks.

A scalper will always be watching what is known as the consolidated tape of a stock, which is the collection of prints showing every transaction that takes place.  Combined with the stock’s book, which is every share posted to buy or sell on all ECN markets, this will give the trader a read on which direction the stock will go, as well as which markets are printing, and possibly even if a large institutional buyer or seller is transacting. This may provide an opportunity to piggyback on the price movement caused by an institutional player.

To be profitable it is essential that a scalper trade with a very specific set of tools, so brokerage choice is very important.    Direct market access to the exchange of a trader’s choice is essential for an equities scalper, because they must have the ability to find the most liquid market.  Even a half penny of price improvement can mean big profits to a scalper, so the ability to find liquidity with dark pools and market making desks can be the difference between being profitable or not.  Dark pools can also offer execution at the mid point of the spread, which executes between the bid and offer.  This can offer a large price improvement when employed many times.  Dark pools can also offer better and cheaper liquidity than may be posted on the LIT markets.

Scalpers must also watch every print that takes place for a stock, so having a professional data feed is a necessity as well as having good charting software.  Always trade with a brokerage offering up to the moment data feeds, because opportunity does not exist for long in the HFT market environment and if your data is slow you will not be in a good place to capitalize on it.

A scalper also works with very thin margins, so it is essential to lower costs as much as possible.  Trade with the lowest cost broker you can, preferably with a broker that will pass through rebates to you from ECN markets.  Sometimes a scalper can make money without even having the price of a stock move, if they have the ability to collect rebates simply for transacting shares.  A trader also must look for a brokerage that offers low priced access to dark pool trading, because rates can vary across firms.  If a scalper does not trade with a broker offering rebates they should make all efforts to limit their trading costs.

A successful scalper will be very diligent and methodical in the way they extract profits from the market, and like all traders they must control risk.  There are also so many computer algorithms operating with scalping strategies that learning how they behave in each individual stock and how to use them to your advantage is essential.  Scalping can be a very reliable way to make profits from the market, but a scalper must develop and stick to his or her strategy 100% of the time to maintain their small margin of profit.

From a mathematical standpoint, it is not common for a traditional equities trader to have a return of more than 20% annually, though some strategies can have higher returns and some can have lower returns.  If a trader has a buying power of $50,000 and returns 20%, they will profit $10,000 for the year.  Ideally for every $50,000 more in buying power, the trader will profit $10,000 more.  A trader can calculate his expected return on his strategy and divide that by his desired profits to calculate the total buying power he needs.

To trade an account marked as a pattern day trading account, a trader needs a minimum equity balance of $25,000.  This can be a significant encumbrance and  many traders do not  have the starting capital required by law to maintain a pattern day trading account.  Traders can fund a day trading account which will not be subject to the $25,000 minimum if they open an account with a proprietary trading brokerage.  This can usually be done with a minimum investment of $2,500 but it depends on the brokerage and their requirements.  A proprietary brokerage is one way traders can access significant buying power to increase their returns.

A better way is through something called a binary options brokerage account.  This is an account that allows traders to return over 80% per trade on winning trades, but the downside is a trader will lose 100% of his money in the position on losing trades.  A trader must be correct over 50% of the time to make money, but the start up costs are extremely low at a $250 minimum, and the potential for large profits are enormous.  We are recommending that traders without a lot of start up capital but who can make money use binary options to increase their account values more quickly than traditional equity trading.  Open an account with us and you will receive extra benefits as well.

The SEC mandates that any retail trading account which places and closes 4 trades within a 5 day period must be marked as a pattern day trading account.  The SEC views day trading as especially risky, and the equity minimum is a way to qualify prospective day traders as those who understand and are financially able to bear the risk.

The SEC requires that any account showing pattern day trading activity be restricted for 90 days from entering into any new positions if they there is not $25,000 of equity in the account.  Traders will still be able to close out positions if they wish during that time.  From an account funding perspective, in practical terms a trader needs to fund an account with at least $35,000. If the  account equity drops below the $25,000 threshold at any time trading will be restricted. An account funded with the minimum $25,000 will have no room for any drop in equity before the restrictions are put on the account.

It should be noted that if a person buys a position with multiple buy orders, or exits a position with multiple sell orders, this is still only considered one trade.  For instance, if a 500 share position is entered into with 5 separate 100 share executions, and then exited with 2 separate 250 share executions the same day, for the purposes of the pattern day trading rule this is only considered one day trade.

Having enough capital to put into a day trading account to avoid the pattern day trading restrictions is not a barrier for some people, but for others this is too large an investment to make.   Even if a trader is able to fund an account with this much money, it still exposes them to a lot of risk.  All of the money in the account used to trade with will be at risk, and if you trade with margin the risk exposure is even potentially greater.

The only way for a day trader to consistently place day trades with an account equity of less than $25,000 is to open a proprietary brokerage account.  A proprietary brokerage is one that specializes in day trading, and most accounts are not subject to the pattern day trading rule.  This is because it is understood that proprietary traders understand the risks of day trading.  Traders can often also keep less total capital at risk by funding an account with a fraction of the total equity needed for a retail day trading account, and have access to firm capital so their buying power will not be limited.

A trader can usually fund an account with a proprietary brokerage for a $2,500 minimum but this can vary amongst brokerages.  The brokerage can then provide buying power in whatever amount they feel comfortable granting the trader.  Usually a $2,500 investment will result in an initial buying power of $25,000 to $50,000, and the brokerage can raise this on a case by case basis if the trader proves themselves profitable and responsible in managing risk.  Traders can of course invest greater amounts and have access to higher initial buying power.  The downside to using firm capital is that the brokerage will normally take some percentage of total profits in a profit sharing arrangement with the trader.  This normally ranges from the trader keeping 70% to 99% of their total profits, depending on experience and profitability.

The good part of this arrangement for the trader is the low funding costs and that the amount of money at risk in the account can be relatively very low to them compared to retail day trading accounts. Proprietary brokerages also usually offer advantageous resources to traders such as better trading software and extra buying power.

The only requirement for opening a proprietary brokerage account is for traders who are based in the United States.  US traders must pass their Series 56 exam to register with a proprietary brokerage.  Foreign traders are not subject to this rule and can register without a Series 56.

It is also worth noting that if you have a margin account with any major retail brokerage such as E-Trade, TD Ameritrade, Interactive Brokerage, or any non-proprietary trading firm, you would be responsible for any loss that exceeded your account equity.  So signing up with a good proprietary trading firm is an excellent way to control your maximum loss, as well as to increase your gains by using the leverage they provide.

At How We Trade, we trade with one of the largest and most reputable firms in the industry.  Traders can open an account with as little as $3,000 and they are not subject to the pattern day trading rule.  Traders are given firm buying power which is expanded as they earn the right to use increasing capital.